TRADING AS A PROBABILITY
Feb 01, 2022“My best trades make money only 63% of the time. Most traders make money only in the 50% to 55% range. That means you’re going to be wrong a lot. If that’s the case, you better make sure your losses are as small as they can be, and that your winners are bigger.” - Steve Cohen
Every successful trader knows that any trade executed may bring either profit or loss since trading is a business of probability. As soon as a trader placed a trade there is 50-50 chance of either loosing or gaining a profit. Losing in trading cannot be avoided and if this is the case then the skill to take losses and not allow it to cause you to lose focus is an act of mindfulness. When traders allow their emotions to overtake their rational thought process they run the risk of overtrading, exposing self to unnecessary risk and unplanned losses.
Since trading is a game of probability, we can either insist that our predictions are right and end up paying for our stubbornness or let our stubborn self-admit that the market will do what it wants to do. Our job as a trader is not to predict what the market will do but to capture the best risk and reward ratio that will make us profitable.
I choose the latter which is what I did on my trade on 02/01/2022. On today's trade, I traded 9 stocks. The SPY just had an amazing rip for the past 2 days and deserve to be on a range and even be on pullback today. I had this in mind before starting the trade. There can be a lot of chop in the open and can have lots of false breakout if the SPY decides to be in range or be on a pullback. If we apply the common adage of day trading "cut losers short and let winners run" with proper execution, share size and proper mindset, retail trader can still be profitable.
Figure 1.0 8/9 trade (UPS chart not included since not able to fit in chart and with a loss of minute $7.76 on this trade, not worthy to distort the chart layout). This figure is my day trade summary for 02/01/22. 4 out of 9 trades that were green and 5 loosing trades.
Although, the accuracy on today's trade is only 40%, I was still able to finish the trade with $1600.00 profit for the day, trading couple of hours in the morning. This is the example of letting your winners run and cutting your losers small. Also, respecting the market that it will do what it wants to do. The way to make money is stock market is by being selective with your trades. Only trade stocks that have the potential to give an optimal reward to risk ratio. In addition, once a retail trader understood the concept of probability, it helps in lessening the emotional attachment a trade can do to a trader.
Keys that made me profitable on these trades.
1. Even before the market open, I already know when I will trade these stocks. I am watching 16 stocks with premarket levels that I mark from 0830 to 0920. I will trade a stock only when it hit my planned entry - this is called not "chasing the stock". This is a practice that will help traders not give in to "FOMO" or fear of missing out. If it does not go to the level of your entry and does not meet the criteria of the stocks in your playbook then you have no business of trading that stocks.
2. Once the stocks hit my target entry, I will click that chart so I can zoom in to that stock, this stock will pop in my 2nd screen that has charts in daily, 15 min, 5 min and 2 minutes. Now that I am zone into that chart, I will zoom it even more by observing the tape and level-two of that stock.
Are there a lot of transactions going through? Does it give me the confirmation in going long or short? Are there a lot of traders hitting the bid (showing signs of weakness) or are they hitting the ask (signs of strength) and flooding the tape with green or red transactions?
Right before entering the trade, I will look into the stocks if the spread is logical. If the spread is not, then I will pass on the trade and wait for another setup.
3. Once I found a setup and entered my trade, I will immediately place a stop loss (I do not do mental stop, it's a recipe for disaster since mentally I can easily place a "hope" trade which is not a strategy) if it stopped me out then fine. At least I did not violate any of my plan and this still gives me the assurance that I am respecting the market. Not respecting the market means violating my stop loss, moving my stop loss or worst not having one.
4. I will partial on the immediate sign of resistance. It could be in the moving average, VWAP, yesterday's close or even a sign of reversal in level 2 or tape. If it is a false signal, I will not regret this since that is part of my plan. I will only take what the market is giving me. Will take profit and will not turn my winning trade to a losing one by moving my stop loss to breakeven.
5. These trades can be in hours, minutes, seconds or microseconds. This means execution should be fast, the reason I have shortcut keys in my keyboard as well as in the screen and with the click of a mouse I can be in 1000K or more of my position. I used both since if my eyes are on the level 2 and tape, looking at my keyboard would distract me in that fast-executing tape transactions and I might miss a good entry. This is the time I will use the shortcut I have in my screen using the mouse.
6. Trades that I take are those that are part of my playbook. These are discussed in detail in different chapter. Then "rinse and repeat". I will end my day reading a trading book around noon to 3pm and will be back on my trading station at 3 pm to look for setups that are good for the following day and finished my trading journal for the day.
Detailed trades on today's 9 stocks that I traded.
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