The Top 10 Mathematics of Trading

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Profitable trading is not about opinions, not about a prediction, or even great stock tips or picks. Profitable trading is all about math, making more money on profitable trades than you lose on unprofitable trades. How you do this is the details. Trading without understanding the math creates randomness and luck in your process. Understanding how you are trying to make the math work in your process can change everything as you move away from ego and emotions and toward quantification of a system that creates the potential for profits.

Traders have to be able to answer the math behind their trading if they want to operate like a professional and achieve consistency first and eventual profitability over the long term.

The Top 10 Mathematics of Trading:

Risk/reward ratios: How many dollars are you risking for an opportunity to make every $100?

Position sizing: How much capital will you put in one position?

Backtesting: How did the signals you are using perform historically?

Draw downs: What is the most amount of capital you would want to lose from your equity peak?

Returns: What is the average annual return zone you are trying to achieve?

Win%: What are your expectations for number of winning trades versus losing trades?

Losing streak probabilities: What are the odds of your worst case scenario losing streak?

Risk of ruin: With your open risk and position sizing what are the chances you eventually blow up your account?

Stop losses: How much will you lose on a trade if you are wrong?

Profit targets: What is your maximum potential reward if you are right about a trade?

It’s all in the math whether over the long term you make money or lose money.

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