A new trader* posted me asking my opinion of a trade set up. Looking at the chart, catalyst and all the other things to find a set up I said, "It looks like a random trade" But my response was too late and too long in coming as he wrote back that he had initiated the trade. Thirty minutes later he posted me and said he sold the stock and made $.25/share with a lightly veiled response of "I told you so". I didn't engage the conversation further as the trader already had the mindset that his set up was accurate. But the trade re-enforces the notion that his random trade was a good set up and the trader can't figure out why his success rate is only 42.7%.

Flip a coin 9 times and have 9 heads come up in a row. What is the probability of a tail coming up on the 10th flip? 50/50. The coin has no memory and each coin toss is an individual event. Now, if you toss the coin 100,000 times, most likely 1/2 will be heads and 1/2 will be tails as it is a 50/50 proposition. That's how probability works. So that is much like a random trade. Sure, some will work, but eventually the rules of probability will take over. The chance of a random trade working are 33% it will go up, 33% it will go sideways and 33% it will go down (and 1% it will get halted). Even the probability of a good set up is not 100%. Look at top traders like Tim Sykes and Tim Grittani, their success rate is about 70-75%. Every 10 trades, they are going to lose on three, but if they cut their losses quickly, the other 7 will more than make up for it. Not so on a random trade. Pretty tough to keep your account growing if only 3 out of 10 trades work for you.

So, find patterns (Tim has thousands of videos pointing them out) that work for you and that you are consistent with. Stick to your trading rules. Track the patterns you trade and statistically analyze them, long, short, pattern, time of day, etc. and find out what is the most successful. And when you find them use them but keep the statistics going as markets are always changing.

You have a 1 in 6 million chance of becoming a multi-millionaire buying lottery tickets so a poor use of money. But a 7 in 10 chance if you find good set ups and stay away from random trades. It is hard to keep the discipline, but if you do, you will be rewarded.

*It actually wasn't a real life event but for illustration purposes only.

Ha! Every time I feel like giving up you get a gem of a post like this - keep 'em coming!

I really like your posts too. Thanks for taking the time to make these!

Always a pleasure to read your Blog Bob.

thanks

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