*Suppose I have a system
that each month provides 60% of winners where
for each trade, using a liability of £250, I aim
for a profit target of £500. Note I am operating an example here where the
risk per trade is 2.5% assuming a bank of
£10,000. (so small trading amounts in highly
liquid markets)*

If I trade 60 times per month
then

Number of winners (60%) = 36

Number of losers (40%) = 24

Income = 36 x 500 = £18,000

Losses = 24 x 250 = £6000

Net profit = £18,000 - £6000
= £12,000

Obviously this will depend on
whether you are able to identify 60 high
probability trades per month (and whether you
have a model which has an edge of 60% whilst
maintaining a 2:1 reward/risk ratio) and you also need to
take into account other factors such as
broker/exchange fees, slippage
and risk management measures such as portfolio
risk for the day/week. But the basic core of
probability is simply this model.

Standard deviation changes would mean that some
months you might make £14,000 another month £10,000,
another month, £20,000
etc but over the course of a year you would be
averaging close to £12,000 per month if all the
trading parameters were constant.

It was this simple and basic
understanding of math and probability that let
me to developing my own trading strategy as a
final effort to try and make some success of
trading. Up until reaching the decision of going
out on my own I had been following the trading strategies of people who had been
marketing and selling their trading systems and
strategies.

Some of these strategies conceptually sounded
plausible and very appealing but when taken into
a live environment they would either be
unworkable over the long term or the owner of
the systems seemed to have made assumptions
about market price behaviour which was not
always correct. The equity curve always seemed
to spiral downwards or remain choppy for
significant periods of time. This was because
many of these systems didn't incorporate
probabilistic models.

Some systems over emphasize
the need for high win rates at the expense of
their risk reward ratio. For instance there are
some systems that focus on their 85% win rate
yet the profit from winnings is 3-4 times less
than the liability for each trade. This probably
explains why many of these gurus use very small
stakes to trade with because they know that
those cluster of killer losses are just round
the corner. You could have 7 great trades only
for a cluster of 2-3 losses to completely knock
back a good streak of wins. Having to trade
small because you operate in fear of the big
losses is one of the reasons why many of these
trading systems are simply not scalable in the
long term.

Another observation I made, mainly in regards to
sports trading, is that many of the systems
being marketed have very little fundamental or
technical backbone. There are some like James Butler at
http://www.betfairprotrader.co.uk who
understand the application of particular
fundamentals such as Monte Carlo analysis,
Sortino/Sharpe ratio and other important
statistical factors
but he is part of a very small minority.

So this led me to
a crossroads where I realized
that maybe what I needed to do was stop trying
to depend on other peoples strategies and simply
build my own.
However where would I start? How do I build a
profitable strategy from nothing? What should I
be looking out for? What core principle should
the strategy be built around?

It all seemed confusing until I by chance
managed to come across an
interview given by Mark Douglas about the
Psychology of Trading and this is where my
journey really began. I had been looking up about
trading and psychology as there were some real
collateral damage that had been done to my
psyche over the years due to the garbage being
peddled on the internet coupled with my
inability to handle the emotional side of
trading and getting traumatized when trades went against me.

I needed help but without a trading community I
felt like the one lone ranger fighting against
the market gods. Furthermore, many of the trading
communities I did see were swarming with
disgruntled people who weren't making any money
and with a very negative outlook about trading
in general yet somehow wanting to offer advice
and guidance.

So an internet search led me to the below video which opened up my eyes to not just the
psychology of trading but also understanding the
necessity of a probability based approach to trading.

The interview is with the late Mark Douglas,
author of the *Disciplined Trader* and *
Trading in the Zone.*