....you can subscribe to one major assumption- That the market has identifiable traits, that it does something with consistency (even if only consistently probable) , therefore making it a constant.
The House Edge in a game of American Roulette is 5.26%- for every million that is invested in payouts to the lucky players, the Casino can expect to make back that million plus 52,000.
The odds are fixed, the process just has to be repeated (ie getting as many people as possible to play the game. This is the reason for the attractive lights in all Casino hotels, not to mention some spreadbetting platforms!)
Same thing with the frequently used coin-flip analogy. If offered $1.01 when you win, let's say when it lands on heads, and you lose $1.00 when it lands on tails, you have edge (E=0.01) as long as the laws of physics remain constant.
Unfortunately, as traders, we have to rely on testing over time as our "constant" which is why I say "major assumption".
After that, it's down to working the edge in a disciplined fashion....accepting the often haphazard journey to profits, taking those SIX losers in a row on the same day that you also took three in a row, stopped to the tick, missing targets by a tick etc. Using the 2:1 (or larger) Reward to Risk structure on every trade but still only making a fraction of your risk per trade on average, assuming E is less than 1 (If yours is higher, please let me know! we'll talk...lol)
Between the aforementioned assumption and the confidence and mental fortitude required to trade the edge with conviction I have only three words:
TRADING IS HARD!
Friday, April 2, 2010
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