Thread by @Fxflow

1/ Love is Conditional and So is Your Profit

Everything in life is conditional. Even love. If you don’t believe me, just ask a divorced person and you will quickly realize that love like everything else depends on context.

2/ Don’t marry your position is an expression used often in trading and it carries more truth than you know as it points to the fact that the relationships we develop with our trades can sometimes be more binding than our relationships with people.

3/ Understanding the conditionality paradigm does not make you a cold heartless human being, it just makes you a better trader. I am in no way arguing that you should treat people around you in a purely calculating, transactional manner.

4/ Anyone who has even been in a successful relationship knows that a huge part of its success lies in tolerating the other partner’s flaws.

5/ I am simply arguing that the level of trust and forgiveness that we afford our better halves should never be extended to our trades in the market.

6/ No one does this better than my business partner Kathy, who in real life can be loyal to a fault, but is utterly ruthless in the markets, letting losers go without a second thought.

7/ This week she flipped a -100 pip loss to +115 pip gain by the end of week, by staying focused on her setups and never nursing her losers.

8/ On Friday I hosted thetradingbattle.com contest with her and @ragheehorner and as part of my evil little plan I made each trader choose 3 of the worst possible setups for their opponent.

9/ After 10 minutes each trader was free to let go of those positions and sure enough Kathy got rid of them the moment she could, displaying the sangfroid that has made a consistent winner every 8 out of 10 weeks over the past two years.

10/ But proper conditionality is not just a function of managing your exits by letting go of the losers. It is also the key to all trading success by forcing you to think hard about choices of entry.

11/ Earnie Chan who is a very well known quant and the author of Algorithmic Trading: Winning Strategies and Their Rationale, recently made an interesting point in a Better System Trader Podcast.

12/ He noted that the probability of a win is not really an interesting statistic in trading since it is basically an average of all trades taken.

13/ What's far more valuable to every trader is the knowledge of conditional probability - that is the probability of winning not on your average trade but on your NEXT trade.

14/ Granted there is no full proof way of knowing the probability of your next trade, but thinking in conditional probabilities rather than just general probabilities sharpens your analysis tremendously.

15/ For example, I have a great Nasdaq scalping strategy that I have been trading live in my chat room since the start of COVID and it has consistently done well for us during the first hour of the market open.

16/ But as the day wore on I noticed that I gave back most and sometimes all of my gains.

17/ I realized that the conditional probability of my setup was much higher during the peak of the auction process ( market opens and closes) and because of this insight I simply stopped taking trades during any other time of day no matter how good they look. End result?

18/ Much higher winning rate. Much better profitability.

Everything in life is conditional and nothing more so than the markets which constantly change regimes and challenge us in novel ways every single day. Everybody looks for the Holy Grail.

19/ The One System that will conquer price action and produce profits forever. But the sooner we realize that real consistency comes from always being adaptive and alert to the changing conditions of the market, the more durable our success will be.