Thread by @TihoBrkan

1/ Trading probability theory.

Can you handle large amount of consecutive trading losses in the row?

Is your risk management on point?

Over the last 12 positions, I've won only 3 trades. My NAV is up 2.8% during that time frame. YTD my trading win/loss ratio is only 41.5%.

2/ It looks as if I don't have an edge in the market. As someone here stated recently "the house always wins."

This is not always true. Let us look at some statistics and understand what I'm dealing with, despite such a low winning rate.

3/ Since I win only 41% of trades, I need to understand probabilities. Over any 50 trades:

• there is a 98% chance I will endure a 5 trade losing streak
• 70% chance I will experience a 7 trade losing streak
• one in three chance I will endure a 9 trading losing streak

4/ There is a meaningful probability that executing trades with my style will result in a plethora of large losing streaks. It is common for me to go through 7 or even 12 losing trades in the row.

Truth be told, I'm so used to losing — that I love losing!

5/ My losses are small & some are forced. I'm the one creating half of these losses because I'm not interested in sticking around to see "what will happen."

The trade either does what I was expecting it or I'm out. I run away faster than a petty criminal being chased by cops!

6/ Let's understand the probability theory regarding small losses.

If I'm risking 3% of my NAV per trade & I go through one of those 9 losing trade streaks (remember: there is a 35% chance of this happening) my account will be in a -24% drawdown.

7/ That is a big blow. Two things I don't like: market volatility & meaningful equity curve drawdowns. So I keep my risk low... less than 1% of my NAV.

Even if I go through an 11 losing trades in the row (and there is a 14% chance that could happen with my 41% win rate)...

8/ ...my account drawdown will be only at 10 to 11 percent. And that is something I'm ok with. I can accept that. What I do is good for me.

You got to ask yourself what is manageable for you?

Now let's move on with trading probability theory.

9/ While my win rate is only 41.5%, my pay off ratio (a.k.a win to the loss ratio) is 3.5X.

In plain English, when I'm right I make 3.5 times more than when I'm wrong.

Or said another way, for every dollar that leaves my account when I lose, I make 3.50 bucks when I win!

10/ And with such a high win/loss ratio of 3.5X, my breakeven number of winners is actually very small.

The number is 22%. I would break even if I won 22% of my trades, or basically said another way I wouldn't bankrupt my account even if I lost 4 out of every 5 trades!

11/ Some of you might be wondering, what is the chance of me going bankrupt? Here are some stats:

• I win 41.5% of trades
• My win/loss ratio is 3.5X
• I risk less than 1% per trade
• 71% chance of losing 7 in the row

Answer: less than a 5% chance.

12/ I don't care about macroeconomics, geopolitics, people's opinions, tips, earnings reports, yield curves. Just the price. I'm a purist!

I run my trading like a business. I know my break-even win rate is 22%, so anything over that is profit. If I win 41% of the time...

13/ ...and my wins are 3.5 times large then my losses, there is a lot of profit to be made there. How can I improve my profit?

Assuming my win/loss ratio stays at 3.5X, for every slight % increase in my win rate (say from 41.5% to 43%) all goes to my bottom line.

14/ How can I achieve this? By reading more about finance? By following investment bank macro research? By subscribing to top research & newsletters? By getting tips from self-proclaimed YouTube guru traders?

No. The answer is no. Not for me & probably not for you.

15/ The way I can accomplish that is by training my physical & mental state. I need to be at my top condition & operate at the highest possible level to increase favorable decision making.

I need to sleep well, I need to do daily cardio, I need to eat well, remain mentality...

16/ ...stable, I don't need arguing with my spouse, I need to mediate & release anxiety daily (even multiple times per day), I need strength training, I need alone time, I need to be bored & walk the park on my own with the phone turned off.

I need to be at an optimal level!