PB-Q
Trading is all about being profitable.
That's why it boils down to PB-Q
P = % Winners
B = Average(Gains) / Average(Losses)
Q = 1-P
The result is your edge
Which is the expected return per unit of risk.
Example ...
A fair coin
0.5 * 1 - 0.5 is ZERO
0% Return per unit of risk.
A biased coin
0.6 * 1 - 0.4 is 0.20
20% return per unit of risk.
I guess we can say you have a 20% edge.
But a value bet can lead to ruin if the risk is unmanaged.
(PB-Q) / Q
That's where risk management comes into play.
The Kelly Criterion gives the max % of bankroll to bet.
It's by itself very aggressive and doesn't prevent a ruinous outcome.
Simply divide the edge by the payoff.
In our previous example (biased coin),
Kelly tells to gamble 20% of the account.
If the bet is 20$ head or tail,
Then you need at least 100$ in your bankroll.
Risk of Ruin wise it's better to bet 1/2 or 1/4 Kelly.
BUT NEVER MORE OTHERWISE RUIN IS 100% LIKELY
You expect to return 1/5 of 20% (4%) on each toss.
...
The point being ...
Profitability is at the core of trading.
It should be everyone's north star (Objective).
As we can see ... It depends upon 2 variables.
The probability of gains and the overall reward to risk.
The goal of a trader should be to improve both.
Or at least ... To avoid long drawdown and large losses.
By removing the left tail of the curve we improve its mean.
We can't tell if a trade is going to be a winner or a loser,
But we might be able to guess their propensities.
Are the conditions ideals or bad ?
This is why many people talk about context.
If your very strategy needs volatility,
The period being dull isn't ideal.
Odds are against "you".
A trader should avoid bad conditions.
In order to improve its odds of winning.
Reward to risk wise ...
It's easy to understand what it takes.
Let winners run and cut your losses short.
What's the bias on your TF ? If any ? Long or Short ?
...
If your actions, what you do every day,
Don't improve P or B in any meaningful way,
Then throw it away because it's a waste of resources.
...
That's all I wanted to say.
Have a nice Sunday evening.
Hope you guys have a nice week !
Don't forget that reaching equity high is the least likely* event !
Don't beat yourself up ! Give it time ! Let the strategy plays itself out.
*Only once in a very while in average
I don't believe we can learn to trade by not trading.
Reading, Charting, Blogging or whatever.
It's all useless ! Trading is trading.
Trading is all about being profitable.
That's why it boils down to PB-Q
P = % Winners
B = Average(Gains) / Average(Losses)
Q = 1-P
The result is your edge
Which is the expected return per unit of risk.
Example ...
A fair coin
0.5 * 1 - 0.5 is ZERO
0% Return per unit of risk.
A biased coin
0.6 * 1 - 0.4 is 0.20
20% return per unit of risk.
I guess we can say you have a 20% edge.
But a value bet can lead to ruin if the risk is unmanaged.
(PB-Q) / Q
That's where risk management comes into play.
The Kelly Criterion gives the max % of bankroll to bet.
It's by itself very aggressive and doesn't prevent a ruinous outcome.
Simply divide the edge by the payoff.
In our previous example (biased coin),
Kelly tells to gamble 20% of the account.
If the bet is 20$ head or tail,
Then you need at least 100$ in your bankroll.
Risk of Ruin wise it's better to bet 1/2 or 1/4 Kelly.
BUT NEVER MORE OTHERWISE RUIN IS 100% LIKELY
You expect to return 1/5 of 20% (4%) on each toss.
...
The point being ...
Profitability is at the core of trading.
It should be everyone's north star (Objective).
As we can see ... It depends upon 2 variables.
The probability of gains and the overall reward to risk.
The goal of a trader should be to improve both.
Or at least ... To avoid long drawdown and large losses.
By removing the left tail of the curve we improve its mean.
We can't tell if a trade is going to be a winner or a loser,
But we might be able to guess their propensities.
Are the conditions ideals or bad ?
This is why many people talk about context.
If your very strategy needs volatility,
The period being dull isn't ideal.
Odds are against "you".
A trader should avoid bad conditions.
In order to improve its odds of winning.
Reward to risk wise ...
It's easy to understand what it takes.
Let winners run and cut your losses short.
What's the bias on your TF ? If any ? Long or Short ?
...
If your actions, what you do every day,
Don't improve P or B in any meaningful way,
Then throw it away because it's a waste of resources.
...
That's all I wanted to say.
Have a nice Sunday evening.
Hope you guys have a nice week !
Don't forget that reaching equity high is the least likely* event !
Don't beat yourself up ! Give it time ! Let the strategy plays itself out.
*Only once in a very while in average
I don't believe we can learn to trade by not trading.
Reading, Charting, Blogging or whatever.
It's all useless ! Trading is trading.
Last edited:
