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How to imagine the smell with math: using risk-reward ratios and probabilities 🧵
1/ Accepting reality
We often get overly excited about the next 100X bag, hoping we land the next $LADY or $PEPE and get revanchist wealth from just one trade.
At the risk of stating the obvious: 100x and even 1000x trades exist... but these things are uncommon.
We often get overly excited about the next 100X bag, hoping we land the next $LADY or $PEPE and get revanchist wealth from just one trade.
At the risk of stating the obvious: 100x and even 1000x trades exist... but these things are uncommon.
2/ Knowing your risk and reward (?)
After identifying the next big thing, we need to decide how much we want to profit from the trade and the max loss we can stomach.
For every $ gain, what am I willing to lose? Most of the time with moon bags.. it is the entire bag.
After identifying the next big thing, we need to decide how much we want to profit from the trade and the max loss we can stomach.
For every $ gain, what am I willing to lose? Most of the time with moon bags.. it is the entire bag.
3/ Knowing we CAN be wrong
Obviously, no one has a 100% hit rate. If you are willing to lose $1 to earn $2 on a trade... you have a Risk-Reward ratio of 2 : 1
This means that you have a breakeven probability of 33% - if you do the trade thrice, you need to be right at least once
Obviously, no one has a 100% hit rate. If you are willing to lose $1 to earn $2 on a trade... you have a Risk-Reward ratio of 2 : 1
This means that you have a breakeven probability of 33% - if you do the trade thrice, you need to be right at least once
4/ Doing the math
% of times you need to be right to breakeven = $ risk / ( $ risk + $ gain)
For a 100X, you must be right at least 0.99% of the time to be flat. Any less you will be losing money, any more you will be in the green
% of times you need to be right to breakeven = $ risk / ( $ risk + $ gain)
For a 100X, you must be right at least 0.99% of the time to be flat. Any less you will be losing money, any more you will be in the green
5/ Implications
Now that you know the minimum % of times you must be right you also know the % chance you will likely be wrong
Hence - to make money you must be right at a higher rate than the break-even % of your moon bags (assuming your price targets are accurate).
Now that you know the minimum % of times you must be right you also know the % chance you will likely be wrong
Hence - to make money you must be right at a higher rate than the break-even % of your moon bags (assuming your price targets are accurate).
6/ Your edge
Edge comes from:
- superior forecasting (good targets and invalidations)
- realistic expectations (not being overly confident/pessimistic)
Everyone has a unique way of finding price targets and invalidation points - to each their own. Some draw lines - others pray
Edge comes from:
- superior forecasting (good targets and invalidations)
- realistic expectations (not being overly confident/pessimistic)
Everyone has a unique way of finding price targets and invalidation points - to each their own. Some draw lines - others pray
7/ Staying in the game
If your strategy is to find 100X baggers with at least a 0.99% hit rate - perhaps going all in every time is not the wisest decision.
Sizing is up to you but you need to stay in the game long enough for numbers to be on your side.
If your strategy is to find 100X baggers with at least a 0.99% hit rate - perhaps going all in every time is not the wisest decision.
Sizing is up to you but you need to stay in the game long enough for numbers to be on your side.
That's really all there is to imagining the smell.
- Accepting you can be wrong
- Predefined risk and rewards
If you enjoyed reading my thread/found it useful please do like and RT it!
- Accepting you can be wrong
- Predefined risk and rewards
If you enjoyed reading my thread/found it useful please do like and RT it!
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