traders edge

Trading Expectations

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As we all know, when we open a trade, we look forward to it being a winner. Given the win rate of a certain trading strategy, there is a random distribution between wins and losses. However, we trade to make money with a proven strategy. The Profit Room’s strategy allows you to be confident when you place a trade. So we don’t “panic close” the trade when the market goes against us, or exit too soon when we are in profit.

If you know the expectancy of your trading strategy, you will be able to deal with these situations better. There is a psychological aspect here: knowing the predictable profitability of a larger number of trades you undertake will build your confidence, which in turn reduces your tendency to shortcut winners and to let losers run too long. Having this confidence will thereby improve your overall results.

How to determine the expectancy of your trading system? Assuming you keep records of your trades, you should go back and look at all your trades that were profitable versus all your losing trades. Do this over a period of at least 3 months and at least 100 trades. The more data you can use, the more accurate the result. We only need 4 pieces of information: number of winning trades, number of losing trades, amount of money won and amount of money lost. From this data we can calculate the following:

Net profit = amount of money won – amount of money lost

Win rate = number of winning trades / total number of trades

Lose rate = 1 – win rate

Average winner = amount of money won / total number of winners

Average loser = amount of money lost / total number of losers

Average reward / risk = average winner / average loser

Expectancy per trade = win rate x average winner – lose rate x average loser

Or, alternatively, expectancy per trade = net profit / total # trades

Expectancy per month (profit forecast) = expectancy per trade x average # trades per month

Expectancy per amount of money risked = win rate x (average reward / risk + 1) – 1

Or, alternatively, expectancy per amount of money risked = net profit / average loser / total # trades

We hope this information helps you in determining your expectancy rate of trading.

The Profit Room 

Is Day Trading For A Living Your Cup Of Tea?

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If you like working with money, then maybe day trading for a living is what you should be doing. This type of trading works daytime hours only, from the moment the stock market opens at 9:30am until it closes at 4pm in the afternoon, you can do a lot of trading in that amount of time. Day trading for livings with your own money, if you loose it, then you have no one to blame but yourself. However, it may be a good way to watch your money grow too. The following is the basic definition of what day trading is all about. Maybe it is your cup of tea, maybe not, only you can decide.

What is Day Trading?

Day trading for a living is when you take a position in the markets with a view of squaring that position before the end of that day. Day trading for a living mean a trader usually trades many times a day looking for fractions of a point to a few points per trade, however, by the end of the day he or she will close out all their positions. The goal of the day is to capitalize on price movement within one trading day. Unlike investors, the day trader will hold positions for only a few seconds or minutes, and never overnight.

What day trading really means.

The meaning of day trading is actually a misunderstood term. True day trading means not holding on to your stock positions beyond the current trading day, meaning your not suppose to hold on to your stock overnight. Trading this way is really the safest way to do day trading, this way one is not exposed to the potential losses that can happen if the stock marked is closed due to news that can affect the prices of your stocks. There are many people out there today who are not very good “day traders.” Because of greed, they will hold their stock position overnight, setting themselves up for the catastrophic elimination of their capital. In day trading currency, the term “day trading” changes slightly. Because currencies can be traded 24-hours a day, there can’t’ really be any overnight trading. You can have open positions for longer than a day with active stop losses than can be activated at any time.

There are a few different types of day traders out there today, it can actually be subdivided into a number of styles.

Scalpers- This type of day trading involves the rapid and repeated buying and selling of a large amount of stocks within minutes or seconds. The goal here is to earn a small per share profit on each transaction while minimizing the risk.

Momentum Traders- This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

The advantages of day trading for a living is there are no overnight risks. Because positions are closed prior to the end of the trading day, news and events that affect the next trading day’s opening prices do not affect your portfolio. Day trading for a living takes skill, experience, and knowledge. Make sure you get educated before you decide to take that on as your main source of income.

The Profit Room

Emotion In Investing

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Humans are all emotional being. We do not always make decisions rationally. Emotion is part of us as investors. Investors might feel better towards stocks at certain point or they might feel that owning stocks are risky and avoid it at all cost.

Investors may also feel attached towards a specific company and continue owning the stock without regards to its fundamental. For example, you might like Google’s search engine so much that you decide to buy the stock  without doing any research. You figure that Google’s search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies. Most investors can identify good companies and products. It is quite easy. You know that a Mercedes is a better car than a Ford or a Civic.

The next question is how much should you pay for a Mercedes or a Civic? This requires us to put aside our emotion for a second and think clearly. Sure, you’d like to have a Mercedes in your life. It is luxurious and have a lot more fancy features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.

Google is a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please don’t over pay. You invest in Google to profit from it not because you like its products.

So, how do we eliminate emotion from our investing decision? We can’t eliminate it completely but there are certainly tools that might help. One is to calculate the fair value of a common stock that you are investing in. Fair value of an investment is dependent upon the streams of profit generated by it. In the long run, if company A earns more than company B, then company A will be valued more than company B.

For a company that is growing such as Google, you can incorporate its growth and calculate the fair value with growth. This is a fundamental approach to long term investing.

Emotion is hard to ignore. We are not immune to that. But following your emotion will cost you a lot of money. Just watch those investors who buy the peak of a stock. Don’t follow the herd and keep your focus on the fair value of your stock. You will do really really well.

The Profit Room