The biggest Secret of Trading and Investing

I’m afraid it’s a complete ploy – There are no secrets to trading or Investing.

There’s no method that works perfectly, it just does not and never has existed, if you’ve bought a system you’ve more than likely been duped, if you think that there’s some way to know what the market will definitely do you’re misguided and probably inexperienced, as long as you wake up to reality it’s not a bad thing.

Most professional traders have a success rate between 30-50%, this very fact means you’re into the world of probabilities, if the professionals have those stats what makes you so special that you’re head and shoulders better than the pro’s?  Exactly you’re not and yet most people base a trading system on odds that are better than what the pros are getting!!!!!!! Wake up please.

People like to think they can read the market, but at the end of the day it’s mostly best guess.  Price and Time are completely DYNAMIC, you cannot predict with accuracy using static analysis – there’s currently NO way to analyse data dynamically either – hence the problem of being able to do so.

The best method of labelling the markets moves is by Elliott Wave, but it only works approx. 40-50% of the time, the reason for this is because you are applying a static analysis of the market and price + time move dynamically, every now and again price and time will move in sync with the market and you’ll obtain picture perfect counts, timings and ratios, then as price and time move dynamically your static counts suddenly go pear-shaped.

W.D. Gann was aware of this, he even mentioned that price moves in 3 sections, he was not so bold to try to label them precisely though as he knew you can’t – well you can with hindsight, but not in real-time with huge accuracy.

Most people go on about  having a risk to reward ratio of 1:3 – which is sound advice, but again it fails people, because it is not detailed enough – I could have a 1:3 R:R but if my 1 x risk is too large (based on price) then I’m not going to get many 3R returns – just because I want a 3R return does not mean the market will provide it – you have to design your method to fit the market, there is a massive difference.

I personally think a R:R of 4R should be aimed for and ideally find a method that provides 10R – this gives you plenty of chances of being totally wrong on your calls and still making some money from the markets – having a 2R target leaves you open to failure, because you start to rely on accuracy to win trades.

Let’s take a gander at an example, pure maths, no set-up – it does not matter:

Every trade we take we risk 1R – 1R is the £ or $ amount you are happy to lose, I personally set this 1R amount on the 31st December every year based on 0.5% of my trading account value and to be honest I often trade a lot less £ risk than the 0.5% – the end result is my survival in the game and an amount that I am happy to lose without consideration.  If the 0.5% is above what I’m comfortable with, I scale back the £ risked so that I am comfortable.

Lets says I take 300 trades in the year, all risking 1R, with costs and slippage you will not keep losses at strictly 1R but as far as your able to you set out to lose typically 1R at most per trade/position.

We are risking 1R to try to make 4R, 300 trades per year, assume we are only correct 40% of the time = 120 winning trades @ 4R = 480R won during the year

That means we’ll have 180 losing trades costing us approx. 180R.   480R – 180R = 300R net profit

So with a trading set-up that wins 40% of the time we’ve generated a net profit of 300R, YOU then decide how much you are happy and comfortable risking per 1R

That was and is Secret #1 .

Secret #2 is the hard part, you have to find a trading method (it could be anything) that produces 4R profit on 40% of positions – this requires you to do a lot of back-testing and what I call Proper back-testing, by hand using your eyes and a real chart to make sure the method WORKS, if the method does not work and generate the R value then you will not make money and that is what all this is about making a profit, not a loss.

I’ve just developed a moving average system that makes 10R – this is obviously a very very highly profitable, allows you to risk a tiny £/$ amount to make really good returns – ALL by skewing the risk:reward in my favour.  It’s a really simple system, I’m sure it could be improved on to increase the R value, the crucial thing is it WORKS, it generates 10R+ which means you don’t have to risk large % £/$ amounts per trade.

Here’s the stats if we were betting £150 to make £1,500 on say 100 trades per year.

Assuming 30% winners = 30 winning trades per year @ £1,500 = £45,000 or 300R

= 70 losing trades = £10,500 (70R) = 45,000-10,500 = £34,500 net profit = 230R profit

Take a minute and think, this system loses more than it wins, but it only risked £150 per trade – you could start this method with an account of £3-5k – risking 3-5% per trade, BUT you’d of turned the £3-5k into nearly £40,000!

That’s a 690% profit in one year! – Who cares whether you can read the markets, whether you’re right or wrong, all you need is a method that makes 10R and is correct 30% of the time, everything else is fluff, the only thing that matters is taking enough trades when they appear – could you have a bad year? Of course, but if you follow the method at some point it will prevail for you – It is IMPOSSIBLE to know at what point it will prevail for you – this is often what kills traders because it means having a series of losing trades, which cause doubt, confusion and extreme stress at which point people give up.

This is turning small accounts into large accounts, because the following year you could increase the £ amount risked and so on.  On the example above you could even drop down to a 20% win rate and still make decent money.

There are no secret methods in this game, no hidden ways to exactly know what the markets will do – so you have to take the game to the markets and the only way you can do that effectively is by skewing the risk:reward in your favour – I’ve seen people selling trading methods that work 50% of the time or less and only produce 2R profit – yes these methods work and I’ve used them myself, but you need to take a lot of trades and risk a lot of £/$ per 1R, which results in a far riskier method than one that wins 30% of the time but produces 10R winners.

I also keep hearing things such as the market trends and consolidates, yes it does, but it’s impossible to know before the fact whether it’s just about to trend or consolidate!  Impossible.  On the back of this it is also impossible to know how long it’s going to trend or consolidate for too!

Once you realise this, it is the moment of clarity – you then realise that really all you have to worry about is taking EVERY signal, Risking an acceptable £/$ amount you are comfortable with and knowing that 70% of the time you should be WRONG, but overall the 30% winners will win big for you! Who do you know making over 50% per annum?  Not many people I can tell you.

Also if you are risking 1R and it turns into a 1R profit, your position on the amount risked is UP 100%, so if you are comparing options and %’s then a standard 10R return is the equivalent of an option increasing in price by 1000% – you have to compare like for like when looking at strategies, because some of them can sound amazing until you start to look underneath the hood!

I’ve not looked into options or strategies – at present they are not for me, I understand that they are brilliant for having a fixed £/$ stop

So we have seen that you don’t have to be super accurate to win big in the markets, all you have to be is on top of the risk:reward and you should do fairly well

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2 Comments

  1. Is it ok if I tweet about this blog?

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