Mathematical Edge for Comfort and Trading Success
This stock trading question from Anton B. may not appear to relate to mathematical edge but let’s take a look. Anton says his #1 challenge is…
“As my account size has grown and I am subsequently taking larger positions my levels of fear and the swings in my account have also increased.”
In many instances we tend to compare our losses with required work ethic, after all, we are brought up under the pretense that one must work in order to get paid. When we trade we haven’t really done any work as such. We buy. We sell. We have a result. If that result is a loss, say a $1,000, then we automatically translate that back to y-hours to be worked in order to recover. In our worst fears it may be that a loss translates to years of extra work.
Optimal trading comes with minimal emotional input, i.e. minimal fear, minimal euphoria etc. here are some ideas:
- Ensure the strategy you have employed has a long term mathematical edge as demonstrated in this video.
2. Even with a long term mathematical edge, we will still encounter losing trades and losing streaks of trades. Therefore, always keep risk to a very small level. If you feel uncomfortable, take it lower again.
3. Rather than think in dollars and cents, think percentages. Each loss is a very small percentage of total capital, i.e. 1%. This will encourage us to distance our thoughts with normal day to day employment.
Fear is a normal response to risk. However, returns are also related to risk; the higher the risk generally the higher the return. It’s a matter of balancing the risk and return to a level where you are comfortable. Knowing you have a mathematical edge also provides comfort as you have tested your strategy and can prove that over the longer term it will be profitable.
Another way to manage risk is to diversify across systems. This may help to smooth your equity curve, take a look at our systems we offer and how these may be of benefit to you.
