Successful trading is about probabilities and risk management

Trades don’t all kick off like Mantra (MTR) which came up as a model stock pick on the 2/10/17 (Entry $3.19) just before the bid which quickly jumped the price to $3.80 (10/10/17) and our new subscribers were happy enough to have begun their Stockradar membership that way.

The reality is that trading is about taking the wins with the losses. Alas winning every trade is unfortunately not the reality but taking wins with losses and using statistical probabilities to help you win more than you lose to make money is. That to me is trading perfection. Isn’t that what we all strive for? The important thing is to win more than we lose and that is Stockradar’s single-minded focus and the trading process we use is driven by that premise. The win loss ratio only needs to be a little more than a 50% ratio to achieve that and the higher we can stretch that ratio the better we will do.

Stretching that ratio must also be tempered with awareness that capital protection also plays a large part in the process of achieving this objective. This means taking losses sometimes, and taking small losses is necessary to prevent big ones occurring. Probabilities again come into play here because just as we don’t know which ones will be the big winners we also don’t know which ones will be the ‘big’ losers. If we put a maximum risk on a trade we ensure we never take big losses, and that’s necessary, so with correct trade management we can let the winners run and run.

A trade example I would like to use today is NEC. An interesting play that saw NEC bottom last November and went on to reverse up (entry 27/3/17 @ $1.18). The stock rallied and our stop was eventually hit at $1.31 (Exit 9/10/17 @ 1.29 + $0.05 dividend). The important point to note is this is a trading strategy that plays the probabilities, doesn’t expect perfection and makes consistent profits. Our aim is not to get tops and bottoms but to take ‘chunks’ of price moves. What happens after our exit is irrelevant as our ‘probability’ trading process has a clear objective of making money with little risk. The probabilities of higher risk became too great below $1.31 for NEC so we protected what we had and exited. Some trades will be big winners and some small but the trade was managed correctly based on our objective of playing the probabilities.

Playing these probabilities can create a consistent absolute return profile for your portfolio with a minimum risk. The result for the six-month NEC trade was a 13.56% return. Not a ‘knock the ball out of the park’ trade but not a bad 6-month return and we played it correctly with regard to the probabilities and the risk. Yes there are the MTR’s (up 18% as I write) and then there are also the TWE’s (up 155%) and the A2M’s (up 205%) whose profits can be unlimited. However, it’s the losses, which must be limited to ensure the outcome we want, which is a profitable trading and portfolio strategy. A sound strategy is about being consistent with our trades and having our expectations set; we do that by playing the probabilities of the likelihood of one thing happening over another.

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