Trade Aptitude

Results of Tuesday’s Best S&P Turning Points: Neither trade suggestion triggered. 

Today’s Best S&P Turning Points (consider wider stops and less size in fast moving markets): 

Buy 3988.00 stop 3984.00. Short 4030.50 stop 4035.25. 

The World Sentiment Index: (+100/-100) REMAINS at -20 with China on holiday, remaining major world markets are modestly Bearish on lower volatility. Historically the close was higher than the open 61% of the time. 

Catalysts: Crude Oil Inventories @ 10:30. Geo-political tensions rise over tanks to Ukraine. MSFT warns. 

Quick Tip: Finding your style. 

There are many winning trading strategies. Read any of Jack Schwager’s “Market Wizards” books and you’ll be convinced of this. To succeed you need to trade the style that resonates with your personality. Otherwise, your confidence and performance will wane.

Here’s an example comparing two very popular styles of trading: Trend Following versus Mean Reversion. Regardless of the tools/indicators you use to enter and exit your trades…

1. Trend Following will generally result in many small losing trades and fewer larger winning trades. The net result of 10 trades might look like this: 30% winning trades of $500 and 70% losing trades of $100 = $80 per trade profit. 

2. Mean Reversion will likely result in more winning trades that are somewhat larger than the losing trades. The net result might look like this: 60% winning trades of $200 and 40% losing trades of $100 = $80 per trade profit. 

Noting that both strategies performed the same in net profit your first thought might be that choosing one over the other doesn’t matter. But it does psychologically. Here’s why: A smaller win percentage will generate more losing streaks and while the amount of money in the end is the same, you may FEEL differently about your performance during those losing streaks. 

The Theory of Runs is a simple math formula we can use that shows the probability of the number of losers in a row. In a 100-trade sample using Trend Following with a 30% Win Rate, you could experience 13 losers in a row. Mean Reversion with a 60% Win Rate, you could experience 5 losers in a row. 

Which feels better to you? Bigger wins with more small losses or smaller wins with less losses? Financially neither may be superior but personally you may have a preference. 

Disclosure: Your actual trading rules may have different results. This is just a “ballpark” for illustration purposes.  

In our trading room we have both Trend and Mean Reversion strategies with edge. Join the team and find your style! Learn more here. 

Trade Fearlessly,

Mike Siewruk 

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