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Trade Like a Casino for Consistent Profits by Adam Khoo makes sense to me

 
Author Admin
Admin


#1 | Posted: 20 Oct 2018 11:15 | Edited by: Admin 


I really think the answer to successful trading lies in this instructional video. I am a firm believer that a logical, more mathematical approach to trading is the key to success.

I am new to trading. I started meddling 18 months back. Initially, by sheer determination (and luck I suppose), I managed to make some money, but thinking back I was being extremely reckless. I could have lost a great deal. As it was I refused to sell some trades. By sitting on them I managed to turn them around from loss trades to win trades. This has meant I have been unable to trade for 10 months or so. During this time I have watched a few videos and thought a great deal about trading in general.

I have a mathematical brain - a logical brain. Let's face it though so have a great many others. If this was all it took then there would be a lot of successful traders out there. But, as everyone knows, there isn't. Most people end up losers - just like in the Casinos, which brings me back to this video ...

Adam explains the 1/ 2 technique - gamble 1 to win 2. A way to load the dice in your favour. How though does it pan out in practice? Let's say you have £5000 to trade with. How do you apply this technique? I will use the Stock Profit Calculator to help with my explanation. Though the calculator is in dollars you can still use it for pounds by simple conversion (£5000 = $6535.99).

Shares do not rise and fall in a straight line. They rise and fall all of the time. To place a stop loss too close will only take you out of the trade well before any profit can be made. To explain this in more detail let's look at the company shares of Solgold as I have been watching them closely as of late. Their share price is around 41p as I write this. A stop loss would need to be at least 3 points away from this number. What does this mean in practice?

A triggered stop loss of 38p equates to a loss off $478 (£365) if you purchased the shares using the whole of your pot (£5000). This is far too much to risk. Some traders - and Adam Khoo is one of them - stipulate you should only risk around 2% of your pot size, so with regard to £5000 this equates to only £100. Such a consideration would equate to a stop loss at 40p with a stake of £5000 - far too close be of any worth as it could be activated in a blink of an eye. How then can you trade on these stocks safely? Quite simply really and that is by altering your stake size.

By referring to the Stock Profit Calculator you can input the initial stock price of 41p (.41) and the final stock price of 38p (.38). Once these are in place you can then alter the 'Allotment' figure so that the net figure is around - $130 ($147 using $2000). In this instance this figure is around $2000 (£1500 thereabouts). Therefore your stake size should only be £1500 max ...

Stock Calculator Inputs ...

Initial Share Price = .41
Final Share Price = .38
Allotment = $2000
Net Profit = -$146

View results here.

To earn the required £200 so the principle of 1 / 2 is adhered to you would place a sell order at around 45-46p.

Initial Share Price = .41
Final Share Price = .46
Allotment = $2000
Net Profit = $243

View results here.

Should the deal fail you will only be out of pocket to the tune of £100, leaving you with £4900 to trade with thereafter - £5200 should the trade be successful.

I was completely wrong initially thinking I needed to place orders of £5000 on each (or higher!), risking the shirt off my back each time. I didn't know what I was doing and 'Stop Losses' were something I never considered. Thankfully I had mostly successful trades and earned far more than £200 each time, but at great risk. I am sure if I had carried on I would have lost everything. As it was my money ended up in shares where to sell would have meant losing £1000s each time. I sold Solgold recently for a small profit but at one point I was losing something like £5000! Thankfully I hadn't risked money I couldn't live without so I could let the money ride for a long period of time with the prospect of the share price rising. With Solgold this occurred, but I have other shares still stuck in the doldrums.

Explaining Adam Khoo's video the maths are such as this ...

If you placed 100 trades in a number of months using the 1 / 2 principal you would have to make a great many poor choices before you lost money. Eh? Incredible though it seems this is the case. Let's look at a win to loss ratio of 50 / 50 - you win 50 trades but lose 50 ...

100 Trades With £5000 Pot Size

50 Wins = 50 x £200 = £10000
50 Losses = 50 x £100 = £5000
Profit = £5000

A ratio where you lose 60% of the time works out like this ...

100 Trades With £5000 Pot Size

40 Wins = 40 x £200 = £8000
60 Losses = 60 x £100 = £6000
Profit = £2000

So even with a pretty poor record of 60% losses you would still make money.

Bear in mind the calculations need to be adjusted for Stock Broker Commissions and any other form of Tax.

Summation

To think with even a 60% loss ratio 100 trades works out at a £2000 profit. A decent trader should be looking at a 60% win / 40% loss ratio apparently which is a profit of £8000. And each time only risking £100. Obviously these figures should be adjusted to suit your pot size.

I'm glad I wrote this as it has made things a lot clearer in my own head. Time will tell whether I can follow my own post's advice though.
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