You’ve probably heard much about mindset and risk management if you’re an aspiring trader. While these are essential factors in successful trading, they’re not the only things you must focus on. In fact, our opinion is that too many traders put too much emphasis on these aspects and not enough on something even more critical:
To succeed at trading, you must ensure you have a positive statistical expectancy and the ability to follow the strategy. What is statistical expectancy? Simply put, it’s the probability that your trading strategy will produce a profit over a large number of trades.
First tip: A positive expectancy
If your strategy has a positive statistical expectancy, you’re more likely to make money than lose. And that’s what trading is all about.
What is a positive expectancy?
That is a mathematical probability of making a profit. For example:
- The win rate is 65%
- The average winner is 2%
- The average loser is 1.9%
The strategy above has a positive expectancy of 0.635% per trade ( (0.65*2%) – (0.35*1.9%) ).
Second tip: Follow the strategy
Trading is about following your plan. Of course, given that you have positive expectancy. It’s about pushing buttons and letting the law of large numbers play out. Don’t lose sight of the forest because of the trees. Losses are inevitable, and prepare for drawdowns.
Most traders have no edge
We suspect that many traders don’t have any edge in the first place, meaning their trading strategies don’t have a positive statistical expectancy. Without that edge, it’s tough to make consistent profits, no matter how disciplined you are with risk management or how strong your mindset is.
So, what should you be focusing on instead?
Two things: you need to focus on making strategies with a positive statistical expectancy, and second, make sure you have the ability to follow your strategy.
You need to make sure your trading plan has a statistical edge before you even start worrying about mindset and risk management. And once you have that edge, you need to be able to stick to your plan through thick and thin.
How do you know if your trading strategy has a positive statistical expectancy?
How do you know if your trading strategy has a positive statistical expectancy? The best way is to quantify and backtest it.
That means running simulations on past market data to see how your strategy would have performed, and measuring its statistical expectancy based on those results. This process can be time-consuming and complex, but it’s essential to be a successful trader.
How To Succeed At Trading – conclusion
In conclusion, while mindset and risk management are important, they’re not the only things you need to focus on as a trader. To make money, you need a trading strategy with a positive statistical expectancy and the ability to stick to that strategy. So, take the time to quantify and backtest your approach, and make sure you’re putting your energy into the right places.
Good luck, and happy trading!
How can I calculate the statistical expectancy of my trading strategy?
To calculate the statistical expectancy, you need to quantify and backtest your trading strategy. This involves running simulations on past market data to evaluate how your strategy would have performed. The formula for expectancy is (Win Rate * Average Winner) – (Loss Rate * Average Loser).
Why is a positive expectancy crucial for trading success?
A positive expectancy indicates that, over the long term, your trading strategy is more likely to make money than lose. It’s a key factor in successful trading as it reflects the mathematical probability of profitability. A trading strategy with positive expectancy typically includes a win rate, average winner, and average loser. These components contribute to the overall probability of making a profit.
How do I ensure I can follow my trading strategy consistently?
Following your trading strategy consistently requires discipline. It involves pushing buttons and letting the law of large numbers play out. Prepare for inevitable losses and drawdowns, staying focused on the overall positive expectancy of your strategy.