Bare with me for a minute because I’m about to go off on a little rant…
I just heard a “trading guru” say that making money day trading the futures market is as easy as flipping a coin. Seriously, this guy was just telling people that if they can flip a coin, they can make money in the e-mini markets. Then he went on to place a trade on the S&P e-mini with a 2 point stop and “took profit” at one tick. ”This is just like a video game”, he proudly exclaimed after he claimed his profit.
Is day trading as easy as flipping a coin?
There seems to be some big misconceptions with people looking at risk management. Let’s just take a look at some elementary arithmetic and test a hypothetical risk management plan.
Win ratio = 50% (For the sake of argument, let’s just assume it’s as simple as flipping a coin to get a 50% win ratio)
Risk management = risk 2 points for 2 ticks profit (let’s be generous and assume he actually gets 2 ticks profit per trade)
After 100 trades, you’d have 50 winners and 50 losers. Your total gross profit on the ES would be $1,250. Your total amount of losses would be $5,000. So, after 100 trades you would have lost $3,750!
Stop playing games and day trade like a casino!
Do you think Las Vegas was built on a strategy equal to flipping a coin? Hell no! All the beatiful lights and casinos were built from the casinos knowing ahead of time that they have a huge statistical edge over traders, and that the emotional behavior of the gamblers will keep the profits pouring in. And the mindset is the exact same for all professional traders.
The money is made in anticipation of what the mass majority of traders is going to do next. In other words, the more confirmation you have on a trade, the more you’ll pay for it. For example, I entered at the absolute highest probability area at 1,139,50 on the sp500 emini. You’ll notice that I got long as price was pulling back into the area, which is considered risky for some traders. However, it’s actually the least risky area to look at this trade opportunity with around 1 pt of risk, have a potential winning ratio on the setup, and have an initial profit target over 3 points. That’s a possible 3/1 reward-to-risk ratio.
Many traders had buy stops above resistance at 1,140.00 for a breakout trade. That entry area could hold a higher winning probability, but it increases the risk to over 2X my entry, and decreases the profit potential by about 50%. I’m not saying the “retail buyers entry” wasn’t a good trade. The only “right decision” is the one that fits your personality and has a winning expectancy.
So run like hell the next time you hear someone say trading is like a video game or “easy as flipping a coin”! Let’s go out as day trading professionals, define our edge like a casino, and trade in a way that fits our own personality.
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4 Comments »
hey chris, nice post.
i would say a trader can do it well even though he is flipping the coin when trading. at least when we’re talking about the market entry. in fact the real (technical) egde a trader has – or not – comes from the trade management and positionsizing he uses.
all the same i believe a Trader can capitalize from using a clever entry – for sure. a good entry helps the trader to maximize the risk to reward parameter of his trading approach.
I’m bit confused why you assume 50% win ratio. With this given strategy where wins are at 1 or 2 ticks and stop loss is at 2 points you surely have many more winners than losers.
How many and can one overcome commission/slippage is another question.
To reiterate what Jan said, this article is worthless because it assumes that from a random entry, a 2-point loss is equally as likely as a 2-tick profit. If it were true that price could move either 2 points in one direction OR 2 ticks in another with 50% probability, why wouldn’t you just reverse the strategy and have a 2-point profit and 2-tick loss? Using the false logic of this article, you would make $3,750! …Of course, this is why so many fail at trading, because they can’t even understand the basics–apparently Chris Dunn doesn’t either.
Rod, thanks for your comment. Yes, I understand the basics, but I think you’re missing the point…
My first point was this – Don’t think you can just jump in the market with random entries and get a 50% win ratio. But if you do that (and somehow end up with a 50% win ratio), you’ll lose over time if you cut your winners short. In other words, your average winner would have to be larger than your average loss to be net profitable on a 50% win ratio after commissions.
Your idea of “just reverse the strategy and have a 2-point profit and 2-tick loss” won’t work because here’s an inverse relationship between “win-ratios” and “reward-to-risk” ratios. So, if you reversed your risk management plan on “random entries” to 2 ticks of risk with 2 point profit targets, you wouldn’t be anywhere close to a 50% win ratio. In fact, you’d get whipsawed out of the market.
You can see the main point of the article was to find entries and risk management that shows a positive expectancy.