Mike power the option traders
My decision to finally start keeping a detailed trading journal has been a huge help. I went through June and most of July just breaking even. One problem was me initiating positions when the major indices and other general market indicators were telling me to stay out.
The biggest problem I had was getting out of winning trades too soon. I always like to push my stops up to break-even when I can but my journal was screaming at me that I was adjusting my stops too aggressively.
I kept getting stopped out of stocks that would have been big winners for me. It was one week after I made that change that I had my biggest day in years. For those that want some numbers — My expectancy since June is 0.
I made that change to how I manage my stops on July 21st. Before that day my expectancy was 0. My win ratio is Yes, you really can be wrong most of the time and still make money! I should add that August has been a very slow month. Sadly most people have never even heard of the concept. Only one of those handful of books discussed expectancy. In simple terms, expectancy is the average amount you can expect to win or lose per dollar at risk.
You can also see how you could have a system that produces winning trades the majority of the time but would have a negative expectancy if the average loss was larger than the average win:. In fact, you could come up with any number of scenarios that would give you a positive, or negative, expectancy.
The interesting thing is that most of us would feel better with a system that produced more winning trades than losers. The vast majority of people would have a lot of trouble with the first system above because of our natural tendency to want to be right all of the time.
Yet we can see just by those two examples that the percentage of winning trades is not the most important factor in building a system. The natural bias that most people have is to go for high probability systems with high reliability.
We all are given this bias that you need to be right. Nothing below 70 is acceptable. Everyone is looking for high reliability entry systems, but its expectancy that is the key. And the real key to expectancy is how you get out of the markets not how you get in. How you take profits and how you get out of a bad position to protect your assets. Tharp defines the following four components of expectancy In the same section of the book Dr. Tharp also discusses how the size of you investing capital and your position-sizing model must be considered along with expectancy.
The fourth item in that list is a very important and often overlooked aspect of trading. For example, system A produces 3 trades per week while system B produces 10 trades per week. Smith has discussed this before:. I think of my equity as inventory. In that respect, my goal is to maximize not profit per dollar, but profit per dollar per day. In essence, I try to make a small percentage on my equity each day, but compound that amount as rapidly as possible.
What matters is the turnover times profit per piece. Imagine that you are hiding behind a large wall of snow. Someone is throwing snowballs at your wall, and your objective is to keep your wall as large as possible for maximum protection.
Thus, the metaphor immediately indicates that the size of the wall is a very significant variable. But if the wall is massive, then you are probably not going to get hit.
The size of your initial equity is a little like the size of the wall. In fact, you might consider your starting capital to be a wall of money that protects you. The more money you have, assuming all the other variables the components of expectancy listed above are the same, the more protection you will have.
Now imagine that the person throwing snowballs at you has two different kinds of snowballs — white snowballs and black snowballs. White snowballs are a little like winning trades. They simply stick to the wall of snow and increase its size…. Imagine that black snowballs dissolve snow and make a hole in the wall equivalent to their size. Black snowballs are a lot like losing trades — they chip away at your wall of security….
Tharp continues walking the reader through different scenarios and possibilities. You can also find Andrew's contributions at Nadex and Money Show. Lance Ippolito is an trader and futures educator at AlphaShark Trading, where he actively trades index futures, commodities, and futures options.
Developing trading strategies focusing on levels, volume confirmation breakouts, and market internals to guide his trading.
A firm believer in education, mentorship, and a stable support system his goal is to help others achieve their trading goals. Ippolito received a B. Mike started to trade shortly after the financial melt down.
In early Mike started to accumulate positions in banks, insurers and automakers. Of course, this eventually led him to the options world, where Mike could leverage up or protect a position easily heading into earnings or an event. Now, Mike uses the options market in his everyday trading. While being a swing trader at heart, he also day trades most of the time depending on market conditions.
Mike follows the options flow while looking for unusual activity to show him where money is flowing. Stephen worked as a computer engineer for IBM for 24 years. He's been trading stocks and options since , mostly self taught and started trading futures in and forex in Having lived in Rochester, Minnesota for the past 39 years, with two daughters and 4 grandchildren Stephen has been involved in trading education for the past 5 years.
Raphael has been working with AlphaShark Trading for over two years and has an expansive background in web coding, design, and development.