Trader’s Equation and Probability Flashcards
Define an Edge for a Trader?
An Edge is a mathematical advantage. Probably will make profit over time
Edges are Fleeting and Small
Edges are Fleeting and Small
Why can a Perfect Trade not exist?
a Perfect Trade would be “ High Probability , Big Reward, Small Risk “ they cannot exist because an institution has to take other side and There is always something wrong with the other side. No firm would take a trade where there is low probability of making only a small reward while exposing Big Risk.
When the Market is in a Market Cycle Traders cannot expect strategy to last long. Once too many computers begin to do same thing, market than advances to the next stage in the cycle
When the Market is in a Market Cycle Traders cannot expect strategy to last long. Once too many computers begin to do same thing, market than advances to the next stage in the cycle
When almost perfect not enough institutions on the other side. because institutions see this near perfect short, they then sell quickly
When almost perfect not enough institutions on the other side. because institutions see this near perfect short, they then sell quickly
Why is a Strong BO bar Big?
The Bar is a Strong BO Bar because all institutions see it as nearly perfect
Your Edge will always be small. The Key to winning and making money is becoming consistently good. You do not have to be perfect to make money, you just have to structure trades that make sense.
Your Edge will always be small. The Key to winning and making money is becoming consistently good. You do not have to be perfect to make money, you just have to structure trades that make sense.
What is the Basis for All Trades?
The Basis for ALL Traders is “ The Traders Equation “ only take the trade if the PROBABILITY OF WIN + REWARD is Greater than the PROBABILITY OF LOSS + RISK
What do skilled Traders base every trade on?
Skilled Traders base every trade on Math
What are the Three variables to consider when planning to take any trade?
Probability, Risk, Reward; you can also think of them as just 2 variables: Probability & Risk/Reward(RR)x
For every trade there is always one institution buying and one institution selling. The 2 institutions are trading probability and RR. One wants higher Probability & the other wants better RR
For every trade there is always one institution buying and one institution selling. The 2 institutions are trading probability and RR. One wants higher Probability & the other wants better RR
For every trade there is always one institution buying and one institution selling. The 2 institutions are trading probability and RR. One wants higher Probability & the other wants better RR
For every trade there is always one institution buying and one institution selling. The 2 institutions are trading probability and RR. One wants higher Probability & the other wants better RR
Example of Extreme RR and Probability
Example of Extreme RR and Probability
The Traders Equation of taking a swing trade versus a scalp trade. *Most traders have a better chance of making money if they swing trade
The Traders Equation of taking a swing trade versus a scalp trade. *Most traders have a better chance of making money if they swing trade
The Traders Equation of taking a swing trade versus a scalp trade. *Most traders have a better chance of making money if they swing trade
The Traders Equation of taking a swing trade versus a scalp trade. *Most traders have a better chance of making money if they swing trade
What are Beginners afraid of?
They’re afraid of Risk. Low risk trades lose 60% or more of the time
What do Experienced Traders think about?
They think about the Math
What are two ways to improve the MATH (Traders Equation)?
One way to improve the RR is by swing trading instead of scalping
&
the 2nd way to improve Traders equation is by Scaling in (Beginners should not do this)
Scaling In - Increased Probability, but Pay for it With RR
Scaling In - Increased Probability, but Pay for it With RR
If Strong Breakout then there is a Strong Bull BO from TR there is a 60% we are going to go up for a MM. However the stop is far and the Risk is Great
If Strong Breakout then there is a Strong Bull BO from TR there is a 60% we are going to go up for a MM. However the stop is far and the Risk is Great
Why is it reasonable to take this low probability short?
Due to the context, DT LH MTR there is a 60% of failure and stopped out
& 40% of a swing Trade.
Since the context is somewhat good and there is a potential for a swing trade with the reward being BIG, the trade is worth it.
After the Bear BO this confirms at least another leg down.
Stay in trade until it tells you it is time to exit
Probability Higher after Bear BO
Probability Higher after Bear BO
High Probability means Scalping (Weak RR)
High Probability means Scalping (Weak RR)
If I want to structure profitable trades what do I need to pay attention to?
The Probability
RR is usually Exact, but the Probability is Never Certain
RR is usually Exact, but the Probability is Never Certain
Whenever I have a strong BO where should I first look?
Always look to the left of any BO, as long as above prior low, still in bull channel, even if present market is AIS
Deep PB in Bull - Risk, Reward, and Probability (Remember; Big Up + Big Down = Big confusion a.k.a TR)
Deep PB in Bull - Risk, Reward, and Probability (Remember; Big Up + Big Down = Big confusion a.k.a TR)
Deep PB in Bear - Risk, Reward and Probability
Deep PB in Bear - Risk, Reward and Probability
Why is this Strong Bull swing still a PB in a Bear Trend?
Because it failed to Break above the previous LH making it a Bear Broad Channel, a PB from the Previous LH Selloff
PB in Bear Less Than 50% - Probability Favors Bears
PB in Bear Less Than 50% - Probability Favors Bears
In the bottom half, probability favors bears. This means at least 60% chance of a new low
In the bottom half, probability favors bears. This means at least 60% chance of a new low
In the upper half (still below previous LH) changing from high probability to strong RR for the bears
In the upper half (still below previous LH) changing from high probability to strong RR for the bears
In top 3rd, RR clearly favors bears. This means at least 2x risk also means probability fell to 40%
In top 3rd, RR clearly favors bears. This means at least 2x risk also means probability fell to 40%
We simply do not know how many dollars are betting on a Bear here until we see the reversal down.
We simply do not know how many dollars are betting on a Bear here until we see the reversal down.
Z-Score is used by Quants to design systems. Traders do not need Z-Score
Z-Score is used by Quants to design systems. Traders do not need Z-Score
As a Beginner you should be trading the I don’t care Position Size. Only worrying about are my setups logical, am I entering at great times, You want to do this as career and it should be fun so by focussing on this you will not have to worry all the time.
As a Beginner you should be trading the I don’t care Position Size. Only worrying about are my setups logical, am I entering at great times, You want to do this as career and it should be fun so by focussing on this you will not have to worry all the time.
In the Traders Equation of Probability & RR (Risk/Reward), of those what is the most important variable?
The Probability is the most important Variable
Computers do not trade on emotion and to make money you must follow & trade on their logic. Probability is the Source of All Emotion
Computers do not trade on emotion and to make money you must follow & trade on their logic. Probability is the Source of All Emotion
90% of the Bars on the Chart are in what _______ ? And 10% of the Bars on the Chart are in what _______ ?
90% of Bars in the chart are in a TR or Broad Channel (you are never more certain than 60%) and 10% of the Bars are in a Tight TR or a BO (only trade in the direction of strength in these scenarios)
Probability of Equal Size Move up or Down
Probability of Equal Size Move up or Down
High Probability of Equidistant Move: try for More Profit. While in the trade keep asking myself is my premise still good for more profit & if so stay in if not exit for profit.
High Probability of Equidistant Move: try for More Profit. While in the trade keep asking myself is my premise still good for more profit & if so stay in if not exit for profit.
What does High Probability usually mean for RR?
It means Bad RR(Risk/Reward Ratio)
Likely to Reach target - Likely Has to Mean at Least 60%. At a Minimum all I need is a Reward equaled to my Risk to have a Strong Traders Equation
Likely to Reach target - Likely Has to Mean at Least 60%. At a Minimum all I need is a Reward equaled to my Risk to have a Strong Traders Equation
If Strong Bear Trend I can sell for any reason, the next important step os decide on a logical place for stop
If Strong Bear Trend I can sell for any reason, the next important step os decide on a logical place for stop
50% PB in Strong Trend has a Neutral RR, but High Probability. Bull Trend, so 50% PB has at least 60% chance of testing high before hitting SL below bull leg. Entry is half way to target and to stop so risk=reward but probability for a winning trade is at least 60% at this 50% PB after a strong Trend
50% PB in Strong Trend has a Neutral RR, but High Probability. Bull Trend, so 50% PB has at least 60% chance of testing high before hitting SL below bull leg. Entry is half way to target and to stop so risk=reward but probability for a winning trade is at least 60% at this 50% PB after a strong Trend
Emini Example of a Sell @ 50% PB in Bear
Emini Example of a Sell @ 50% PB in Bear
In general when I have a High Probability Trade is the RR Good or Bad?
It is generally Bad
Example of a Buy @ 50% PB in Bull
Example of a Buy @ 50% PB in Bull
Very often when I get a 50% PB in a reasonable strong Bull Trend, the Selloff is so strong it looks like the Bull Trend is failing and its reversing; However the odds are if you take too 50% Buy I am going to make money even if the Reversal down is Strong
Very often when I get a 50% PB in a reasonable strong Bull Trend, the Selloff is so strong it looks like the Bull Trend is failing and its reversing; However the odds are if you take too 50% Buy I am going to make money even if the Reversal down is Strong
High Probability Means Bad RR. Whenever you have 60% Probability I usually have bad RR
High Probability Means Bad RR. Whenever you have 60% Probability I usually have bad RR
Strong BO, with Good Context so there is a High Probability.
Strong BO, with Good Context so there is a High Probability.
As size of the BO grows so does the size of the target. The math is getting better as the BO continues
As size of the BO grows so does the size of the target. The math is getting better as the BO continues
As Growing BO occurs which simultaneously increases the Reward does the Risk also increase or stay the same?
The Risk stays same
Profit Taking but still in a Bull Trend
Profit Taking but still in a Bull Trend
Strong BO, with Good Context = that means High Probability and traders selling the Bear BO Close has a 60% Probability of hit target before stop is hit. Reward is equal to Risk.
Strong BO, with Good Context = that means High Probability and traders selling the Bear BO Close has a 60% Probability of hit target before stop is hit. Reward is equal to Risk.
For Early Sellers when the Bear BO continues the Target Increases but the Risk Does NOT
For Early Sellers when the Bear BO continues the Target Increases but the Risk Does NOT
In a BO trade entry when does my Profit Target Grow?
My Profit Target Grows as the BO Grows. The probability stays the same at 60% even as the BO grows.
What caused this strong Reversal up at this MM target?
The Bears took profits
Take Profits at MM Projection
Take Profits at MM Projection
Near Target a Trader often Believes Probability is 90%. The market usually has to go 1 tick past your limit profit order to get filled
Near Target a Trader often Believes Probability is 90%. The market usually has to go 1 tick past your limit profit order to get filled
When Near target you have to be 90% sure the target will be hit or you will be risking at least 10 ticks. Bad RR can be Good.
When Near target you have to be 90% sure the target will be hit or you will be risking at least 10 ticks. Bad RR can be Good.
If Risk is Greater than Reward, I need 70% Winners. For this Traders so mostly swing Trader were the Reward is as at least twice the Risk. (If scalping you have to be profitable 70% of the time to make money over the long term)
If Risk is Greater than Reward, I need 70% Winners. For this Traders so mostly swing Trader were the Reward is as at least twice the Risk. (If scalping you have to be profitable 70% of the time to make money over the long term)
If Risk and Probability High, Skilled Traders can Scalp
If Risk and Probability High, Skilled Traders can Scalp
What is the 40-60 Rule?
90% of the time the probability is unclear resulting in setups not looking so strong. This is when the 40-60 Rule exists; it is the Probability is 40-60% for Both the Bears and Bulls
Options tell us that we must assume that 90% of the Bars on the charts will go up or down 40-60% of the time
Options tell us that we must assume that 90% of the Bars on the charts will go up or down 40-60% of the time
What are 90% of the Bars on the chart in?
In a Channel or TR
Blue Boxes = 40-60% market can go in any direction therefore I can Buy or Sell; Green Boxes = 10% Market is in a strong BO in one direction therefore only buy/sell in the direction. This is amazing insight because that tells me that 90% of the time both Bulls and Bears can make money
Blue Boxes = 40-60% market can go in any direction therefore I can Buy or Sell; Green Boxes = 10% Market is in a strong BO in one direction therefore only buy/sell in the direction. This is amazing insight because that tells me that 90% of the time both Bulls and Bears can make money
Both Bulls and Bears can both have positive Trader’s Equations!
Both Bulls and Bears can both have positive Trader’s Equations!
In Bear, Swing Case for Bulls and Bears: Bulls want Trend Reversal and Bears want Trend Resumption(This is the market 90% of the time, both Bulls and Bears can make money)
In Bear, Swing Case for Bulls and Bears: Bulls want Trend Reversal and Bears want Trend Resumption(This is the market 90% of the time, both Bulls and Bears can make money)
In Bull, Swing Case for Bears and Bulls: Bears want Trend Reversal and Bulls want Trend Resumption(This is the market 90% of the time, both Bulls and Bears can make money)
In Bull, Swing Case for Bears and Bulls: Bears want Trend Reversal and Bulls want Trend Resumption(This is the market 90% of the time, both Bulls and Bears can make money)
Whenever I see an “ii” or “iii” assume it is a triangle on a smaller TF Chart. (Triangle = BO Pattern)
Whenever I see an “ii” or “iii” assume it is a triangle on a smaller TF Chart. (Triangle = BO Pattern)
If Everyone Knows PA - How can it work?
If Everyone Knows PA - How can it work?
IN PA Trading if you don’t know who is trapped, you will soon discover that it is you! If you take a trade and don’t believe that the exact opposite can happen at least 40% of the time, you will be trapped in and out of positions!
IN PA Trading if you don’t know who is trapped, you will soon discover that it is you! If you take a trade and don’t believe that the exact opposite can happen at least 40% of the time, you will be trapped in and out of positions!
Trapped Out of a Good Trade. If Trapped out of trade, great traders always look to sell again
Trapped Out of a Good Trade. If Trapped out of trade, great traders always look to sell again
In a TR where is probability high for the Bulls & the Bears?
Probability is high near the top for the Bears (Upper Half) 60% chance of the Bears making money before it hits SL and High for the Bulls near the Bottom (Lower Half) 60% chance of the Bulls making money before it hits SL
