1.3 KiB
Edge positionning
Introduction
Trading is all about probability. no one can claim having the strategy working all the time. you have to assume that sometimes you lose.
But it doesn't mean there is no rule, it only means rules should work "most of the time". let's play a game: we toss a coin, heads: I give you 10$, tails: You give me 10$. is it an interetsing game ? no, it is quite boring, isn't it?
But lets say the probabiliy that we have heads is 80%, and the probablilty that we have tails is 20%. now it is becoming interesting ...
That means 10$ x 80% versus 10$ x 20%. 8$ versus 2$. that means over time you will win 8$ risking only 2$ on each toss of coin.
lets complicate it more: you win 80% of time but only 2$, I win 20% of time but if I win I win 8$. the calculation is: 80% * 2$ versus 20% * 8$. it is becoming boring again because overtime you win 1.6 (80% x 2$) and me 1.6 (20% * 8) too.
The question is: how do you calculate that? how do you know if you wanna play with me?
The answer comes to two factors:
- Win Rate
- Risk Reward Ratio
Win rate is quite self explanatory. means over X trades what is the perctange winning number of trades compared to total number of trades (note that we don't consider how much you gained but only If you won or not).