Last updated: 20240324
What are your barriers to trading success ?
Many new traders can easily get caught in the trap of focusing more on their winning percentage (accuracy) or entry setups, rather than having a balanced approach to their overall trading system, thereby creating common barriers to trading success.
There are many aspects to successful trading which are equally important and must not be neglected, including risk/reward ratio (generally making more on your winning trades than you lose on the losing trades), trade management, money management, trading psychology etc.
Another critical, yet often overlooked aspect is, knowing the system you’re trading actually has a positive edge/positive expectancy (please note a positive edge is not simply having an accuracy rate greater than 50%).
Remember trading is an odds-based endeavour and traders are continually challenged by the prospect of making decisions in the face of uncertainty. As a trader, we must therefore place our trades based on a trading plan/system which has a proven edge (positive expectancy) and learn to think in terms of probabilities.
The importance of this statement must not be underestimated!
However every day, many traders put their hard earned money into the markets WITHOUT even knowing their system truly has a positive expectancy or worse still, not even trading to a documented and properly back tested trading system/plan.
- This is a clear barrier to your trading success!
“We look to enter where the outcome is unknown BUT the odds are in our favour”
— Davin Clarke
As Davin’s quote above indicates, trading is a business of dealing with probabilities, not certainties, and traders must train themselves to think in terms of probability for a very important reason:
Individual trades are not predictable. However, we can achieve a level of predictability in the outcome of a series of trades when you have an edge.
Mark Douglas (in his book, “Trading in the Zone”), calls this….
Paradox: Random Outcome, Consistent Results
Trading probabilities and Positive expectancy
So, how do you make the probabilities work for you?
- Trade ONLY When You Have A Positive Edge !
But what does this actually mean?
Ask yourself the following question…
“What is my System Expectancy, also referred to as your “Trading Edge” (average $ return per trade) for the trades I’m currently placing in the market“?
If you’re unable to answer this question, this may be one of your key barriers to trading success and indicates that you are either:
- Not recording your trading results at all,
- Not analysing the results of your recorded trades, or
- Are unsure how to calculate these values
In any case you need to take action in order to track your trades and analyse your results…
- Accuracy (Winning Percentage)
- Average Win (Net $)
- Average Loss (Net $)
- Losing Percentage
- Risk/Reward Ratio
- Expectancy ($ per trade)
If your unable to create such a spreadsheet, or looking to record and analyse your trading to a deeper and more detailed level, consider using an existing Trading Journal product such as “Trading Journal Spreadsheet®”
https://www.GlobalTradingTools.com/view/TradingJournalSpreadsheet/
How to calculate Trading system expectancy
If creating your own spreadsheet but unsure how to calculate the expectancy of your trading plan, below is the formula:
Expectancy ($ per trade) = (Win% x Ave Win) – (Loss% x Ave Loss)
This expectancy value tells the trader how much money they would expect to win on average, per trade, however, to get a clear picture of your system expectancy you really need to aim for an absolute minimum of 100-200 trades, but the more the better.
Use a product such as NinjaTrader ‘Market Replay’ functionality to speed up the initial back testing of your plan, however after completing initial back testing, you then need to trade your system in a demo or simulation account to confirm you’re able to replicate the back tested results on live markets.
Only after these steps have been successfully completed, should you then consider trading in a live account (using your own capital), starting with small trade sizes.
This is NOT trading advice, just educational material to illustrate the process traders can go through. Your capital is at risk and you must do your own research.
Step 1:
We have a 55% probability of winning $280 and therefore, a 45% probability of losing $140
Step 2:
Expectancy ($ per trade) = (Win% x Ave Win) – (Loss% x Ave Loss), therefore …
= (55% x $280) – (45% x $140)
= 154 – 63
Expectancy ($ per trade) = + $91
If these were your trading statistics over a large sample size then your system would certainly have a positive expectancy, and therefore a positive edge.
If the trader of the above figures placed 100 trades (applying their trading plan with consistency and discipline) they would expect, on average, to make approximately $9,100 over 100 trades.
The real results of course will not be exactly the same (perhaps a little more or a little less) however if the edge that produced the above system statistics was applied by the trader consistently and with discipline, then over a 100 trade sample, they would expect, on average, to earn around $9,100.00
If however, the trader does not apply their edge with consistency and discipline, for example by taking “ad hoc” trades, entering earlier than defined triggers, not following trade or money management rules or failure to hold to targets while the premise for the trade is still intact, then it is extremely unlikely the trader will be consistently profitable over the long run…. which after all is what we’re really aiming to achieve.
Successful trading checklist:
- Ensure you have a documented AND back-tested trading plan which shows a clear positive expectancy over a large number of trades.
- Ensure you have clearly defined money management (eg % risked per trade) and trade management rules within this plan.
- Trade your trading plan/system with consistency and discipline.
- Take your losses at pre-determined stop levels, and while the premise for your trade is intact, let your trades run to pre-determined target levels (Risk/Reward ratios)
- To get a clear picture of your system expectancy you need an absolute minimum of 100-200 trades, however the more the better!
- If your trading plan does not show clear positive expectancy then no amount of trading psychology, or anything else for that matter, will help in the long run… remember this is an odds based industry.
- trade ONLY when you have an identifiable, proven positive edge!
Thank you and good trading.
You understand and acknowledge that there is a high degree of risk involved in trading securities, currencies/foreign exchange and/or derivative products. Trading securities, currencies/foreign exchange and/or investment in derivatives can be very speculative, involves considerable risk, may result in losses and is not suitable for every investor. Global Trading Tools does not take into account the objectives, financial situation or needs of individual users. Hence, You should carefully consider whether trading in securities, currencies/foreign exchange and derivative products is appropriate for You in the light of your financial circumstances. You should be aware that dealing in products that are highly leveraged carry significantly greater risk than non-geared investments such as share trading. As such, You could both gain and lose large amounts of money. You may sustain losses in excess of the moneys You initially deposit and also in excess of the margin required to establish and maintain any positions in leveraged products.
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The past performance of any trading system or methodology is not indicative of future results.
THIS ARTICLE IS FOR EDUCATIONAL PURPOSES ONLY.