Heads or Tails?

What does TRADE have in common with heads and tails?

Well, many use simple randomness to define whether they should buy or sell and this is directly linked to heads or tails, but the point I want to address is the following: a coin with two sides has a 50% chance of falling either on one side or on the other, either heads or tails, but if you decide to toss the coin 10 times up, it could land 10 times heads or even 7 times, and at that moment you might wonder, but the probability is not 50%, shouldn't we have 5 times heads and 5 times tails? Yes, but the short-term randomness makes the low probability happen! Now if you toss that coin 10,000 times, the law of large numbers is likely to make the 50% probability dominate the outcome!

But where does this fit into TRADE?

Basically in all operating models, if you operate you have a hit rate allied with a ratio between risk and return, these two things are directly linked, many seek a higher hit rate, others seek more PayOff, but regardless of your profile, from your approach you have to know that a model in the short term does not become a winner or a loser, you need a historical basis of how your approach behaves and then, yes, decide to operate using this strategy.

Many say that with a strategy with 2x your risk and a hit of 50% you will be profitable, statistically this is true, but are you willing to faithfully follow this model even taking CONSECUTIVE STOPS?

We should be, but those who trade know that a sequence of Stops does not generate a pleasant feeling! And it's precisely that feeling that can leave you in the middle of the way!

See below the SHARP index many do not know, but I will present here, what is the SHARP index? The Sharpe Ratio is used to show to what extent the return on an investment compensates the investor for taking risks on his investment. (I recommend using it in your models or in your performance reports).

When using the formula you find a result called SQN
See the example of heads or tails in practice, with a positive risk/return ratio

See that only with time you will be able to validate a winning strategy, and in the middle of the way it is possible that you will have some Stops, and this should refine your way of operating, in order to find points to be adjusted, many books define that time takes you are the excellence, but the biggest illusion that the market generates is that of getting rich fast, contradictory isn't it, this makes the journey of a trader with frustrations and disbelief difficult.

But few are willing to go through this journey, as if that were not enough, you will find that there are no facilities, many preach that you must choose between Access Fee or PayOff most of the time, these they are opposite characteristics in objective models, but the secret is simple!

You need to find balance

See this great example, most people who operate the market have already learned about the EMA 9 or MA 9 anyway, it's an easy model to learn that promises good profits, but when it hits, but what few told you is that it rarely hits ! Even so, it can be a profitable model in several assets.
In my tests, the model has an average success rate of 31%, unfortunately few people have the emotional energy to use this, since they give up even before the model reverses the capital curve to the positive side.

See this model in the same example of the difference between few trades vs many trades

Here it is clear the importance of time and consistency in defining a model and faithfully executing it!

So what do we learn from this?

First: The law of large numbers rules the market.
Second: As much as the PayOff is high, you may not have your emotions trained enough to withstand a losing streak, many will say "But in this model I'm losing with a spoon and winning with a bucket", that seems to make sense, but in reality practice, it's more painful than it looks.
Third: Be willing to operate your way, know that your emotional profile is unique, so use techniques and refine your market reading, beware of false simplicity or the highest degree of complexity to operate the market, be willing to see the that makes sense to you and metric it to use with confidence.
Fourth: Trading the market is like learning to walk, you need help at first, but then you need to fall over your falls and gain balance, it's the same here, you'll make mistakes, but that's the only way you'll learn.

I hope I helped you with this topic, if you liked it, leave your BOOST to support this idea, and also leave it here in the comments if you are from the PayOff team or the Hit Rate.