The odds are against you (Credits)

This post has been a long time pending thing on my bucket list, as a trader looking to share his thoughts, writing can be an out of the job skill.

This post is a piece of simple advice to people who are aiming to make an income by trading any asset class. Equity, bond, forex or crypto for that matter. The 2 things are

Risk management and Indicator usage. Let’s start with Risk management.

What does it mean and how can it help you make money as a trader?

On a fine day the chances of making a profit or loss for a trader, let’s call him A is 50:50. His chances of making or losing money are the same as to him. Surely this needs a decent sample of trade.

For example, A need to trader 20 trades to reach a mean of 50:50 win and loss. It may be that first 10 trades were a loss or the first 10 were win, as long as A doesn’t get influence and buys and sell on an uneventful trading day were no external factor are affecting the markets then reaching a 50:50 is a given over time.

So here’s where risk management comes into play. You see there is a more complex and geekier version of risk management but I like to think of it as Risk: Reward ratio. In the above example the user The Risk: Reward ratio was 50:50 because not only was the chance of a win and loss 50:50 but even the expected profit and loss were 50:50.

If the user would change the expected profit and loss then the risk to reward can be changed accordingly.

For example, the changes to win and lose are still 50:50 but every time I will I take a 2% profit and every time I lose I exit the trade with a 1% loss. So even if I win 5 trade and lose 5 trade I actual gain 10% in my winning trade and lose only 5% in my losing trades assuming the initial amount invested is the same.

By simply changing the expected Reward: Risk ratio (R: R) to 2:1 from 1:1 (another way of saying 50:50).

The second part of the Advice includes using an indicator. For this example, we will use the most basic indicator such as SMA. It’s a very known method to buy an asset if its price closes above a set SMA value and sell when below one.