Dear all,

Whenever we are trying to have success in trading we have to try to find an edge that plays out when several trades are taken.

What I mean by that is that a single trade should be insignificant. But by placing several trades the edge that we have or our alpha will be productive in the long run.

This means that our experiment by placing several trades can be seen as a theorem that describes the result of performing the same experiment a large number of times.

The more trials are performed the nearer to the statistical truth the results will be. This means that results are random in the short run but will be closer to the expected value in the long run.

Now there are certain advantages to be a high frequency or day trader for that matter because you will have more trade examples in a shorter amount of time.

If being a swing trader or position trader is your style of trading then you just need to be aware that you will need more time to have  sufficient examples of your trades to perform your analysis.

Sooner or later you will need to find your trading style where you can execute your trades with the less amount of stress as possible. Placing a trade needs to become second nature that sould become as natural as possible.

You need to find out what works in the market and use this information for your system. Try to relate as much as possible to other traders who share some knowledge or already have a system.

Once this is done you need to develop a trading plan.

This would be a piece of structure or some guidelines that defines when you enter a trade, how you manage it and when you exit your trade.

To help you I will provide de following advice: which time frame to use? Which markets should you trade? Risk management? How about having a plan with IF clauses. If A happens then I will act, if B happens then I may add to my position and if C happens I will ……

Like this you will be objective and less discretionary.

An example I only go long if price is over the 200 MA and 55 MA…. if long I wait for price to retrace to an area of support before I initiate my trade.

Once this is done you need to test it in the markets. A demo is fine or then live on a small account.

You will have true results only if you have the discipline to follow your plan.

The next step would be to record your trades and even taking some screen shots.

This might include the date, the duration of the trade, the setup, the time frame and what pair you trade, lot size, direction, entry and exit price, risk reward and your stop loss.

Afterwards once this is done you may review your tardes to look for your edge.

Now its important to find your expectancy= (Winning % *Average Win)-(Losing%*Average Loss)-(Commission+Slippage)

If the numbers are positive then you have an edge and might continue to trade your system.

If not then you may see where the issue lies and try to a) increase your winning %, b) increase your average win or c) decrease your average loss

I hope that you may find this information useful and use it to your advantage.

Wishing you the BEST OF PIPS…

3 thoughts on “The Law of large Numbers”

  1. Liezel Wilson says:

    Brilliant! One of the most useful posts I’ve read so far. Thanks Nuno

  2. Ryan Gandalf van Jaarsveld says:

    Thanks Nuno – again, really liking these educational pieces

  3. Jim Reddihough says:

    Thanks Nuno

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