Here’s the deal …
95% of merchants do not know what is needed to achieve commercial success.
That is why many merchants have exploited their accounts.
That is why most merchants turn in circles for years without results to show.
That is why only 5% of merchants are successful in the long term.
So what is needed to achieve commercial success? Anyone who is constantly profitable in the long term?
Relationship to reward?
Commercial psychology?
Discipline?
No, it’s more than that and it’s not what you think.
So, let’s break this.
The first thing you should know is …
Edge
An advantage (also known as expectation) is something that you do repeatedly that produces a positive result.
For example, you throw a coin:
- If head appears = desire $ 2.
- If tail arises = you lose $ 1.
In the long run, will you win or lose?
You will win. That is the size of its victories is bigger than its losses. In other words, it has a positive advantage (also known as positive expectation).
Now, what happens if it is the opposite?
- If head appears = desire $ 1
- If tail arises = you lose $ 2
In the long run, will you win or lose?
You will lose. And you can see why. In this case, it has a negative edge (also known as negative expectation).
Next, let’s go to more details so that you know if your commercial system has an advantage or not …
How to objectively define an edge
Mathematically, an advantage can be defined as follows …
E = (extraction % x average gain) – (loss of % x average loss)
Do not worry, this is not space science because even a 12 -year -old child can understand it.
Let me give you some examples so you can see how this works …
Example 1: Positive EDGE (High winning rate)
- Winning rate: 70%
- Average gain: $ 80
- Loss rate: 30%
- Average loss: $ 100
E = (0.7 × 80) – (0.3 × 100) = $ 26
This means that you can expect to win an anverage of $ 26 per operation. Then, after 100 operations, you can expect to win around $ 26 × 100 = $ 2600.
Another example …
Example 2: EDGE positive (low winning rate)
- Winning rate: 40%
- Average gain: $ 200
- Loss rate: 60%
- Average loss: $ 100
E = (0.4 × 200) – (0.6 × 100) = $ 20
This means that you can expect to make an anverage of $ 20 per operation.
And one last example …
Example 3: negative EDGE (High winning rate)
- Winning rate: 70%
- Average gain: $ 10
- Loss rate: 30%
- Average loss: $ 100
E = (0.7 × 10) -(0.3 × 100) = -$ 23
This means that you can expect to lose an average of $ 23 per operation.
Example 4: negative EDGE (Low winning rate)
- Winning rate: 40%
- Average gain: $ 120
- Loss rate: 60%
- Average loss: $ 100
E = (0.4 × 120) -(0.6 × 100) = -$ 12
As you can see …
It can have a high winning rate and still lose (example 3)
It can have a favorable risk-re-risk relationship and still lose (example 4).
So, whenever you listen to someone to say …
“Profitable trade is about finding a minimum of a risk ratio of 1 to 2”.
That makes no sense because its winning rate is too low, a risk ratio of 1 to 2 will not save it.
So here is the deal:
By itself, its winning rate or risk / delay relationship makes no sense. You must combine both to know if your commercial system has an advantage.
Now, having a single advantage will not make it a profitable merchant. You also need …
Risk management
Risk management protects its inconvenience regardless of what happens (even if it has 10 losing operations in a row).
Without it, only a winning commercial system will fail.
This is what I mean …
Imagine that there are two merchants, John and Sally.
- They have a $ 10,000 commercial account
- They have a 50% winning rate
- They have an average of a risk ratio.
- John runs the risk of $ 5000 per operation
- Sally risga $ 100 per operation
The result of the next 10 operations is the following …
Lose the victory of the victory of the victory of the victory of La Victoria
Here is the result of both merchants …
John exploded his account (after 2 losses lost in a row).
Sally obtained a gain or $ 1000 (calculation: -100 x 5 + 300 x 5 = $ 1000).
Do you see what I mean?
This is the importance of risk management because it protects its inconvenience so that it can let its edge develop in the long term.
But that’s not all because you also need …
Discipline
Discipline refers to following the rules of its commercial system regardless of what happens.
Even if you are on vacation.
Even if you don’t feel like it.
Even if you found 10 losses in a row.
That is because you never know the result of each trade. When omitting operations, it is avoiding the winning operations that could pay the many small losses in which it has previously incurred.
Let me give you an example …
Imagine that the result of your next seven trades is as follows:
Pursue losing the victory of the victory of Victoria
As you can see, following its rules, it has found three losses in a row. In the fourth commercial opportunity, he decides to omit the exchange because he believes that he is likely to be a loser.
Then you skip the trade, and turn out to be a winner.
Then, the fifth commercial opportunity appears, but the pain of its recent losses is still raw, and does not want to live it again. Then you decide to omit the exchange. And again, it turns out to be a winner.
Soon, the sixth commercial opportunity arises. Now you feel caught because you are not sure that you follow your system or saute trade.
You ask yourself …
“Should I follow my rules?”
“But victories must recently mean that losses are just around the corner.”
“This means that the next trade is likely to be a loser.”
After many doubts, you decided to omit the exchange once again, and boom, another winner!
At this point, he feels disappointed with himself for not following his rules and choosing his offices based on his feeling, instead of what he knows he should go.
Then you promise that you will take the next exchange when the opportunity arises.
Potaly, the seventh opportunity arises and you follow your rules.
Finally, you caught a winner! But, you still lost money in general. This is because its recently winner is not enough to cover their previous losses.
However, if I had the discipline of following your rules instead of trade depending on your feeling, you would simply have profitable.
So here is the deal …
The consistent action leads to consistent results. If you want to be a consistently profitable merchant, then it must be consistent with your actions, and that means being a disciplined merchant!
Now, he knows what is needed to become a consistently profitable merchant. But still …
Why most merchants fail and how to avoid it?
Here are 3 common reasons why merchants fail …
- No risk management
- Without edge
- No discipline
Let me explain why it happens and how you can avoid it …
No risk management
Most merchants exploit their accounts because they have no risk management.
For some, they do not have discipline or have an idea of what they are doing. So, when you combine thesis factors, it is a recipe for disaster. This is how merchants can fly multiple commercial accounts.
So what is the solution?
Risk management.
This concept is not a diffusion of learning and will pay dividends for the rest of your commercial career.
If you want to learn risk management for the trade of shares, observe this training …
