The Secret Formula for Super Successful Trading

Who wouldn’t want a crystal ball that enables them to peep into the future and bet on the stocks that will generate the highest return! Unfortunately, such a crystal ball doesn’t exist beyond one’s imagination.

But to be super successful in trading you don’t need a crystal ball but simple things that work almost as well as a crystal ball. And these “secrets” are hidden in plain sight but tend to be overlooked as these go against some preconceived notions about trading — one of the notions being that trading is extremely hard and only the elitists succeed. That’s as far from the truth as it can be. Really anyone from any walk of life can be successful with just three things:

Duh! Isn’t that what elitist traders have access to that regular traders don’t?

It actually isn’t and let me deconstruct each one of these for you to reveal how simple they are.

The Secret Edge. Very simply this is about having the knowledge of the behaviors of the market and that of individual stocks. Just like before driving a car, one is required to know how the accelerator, brakes, and the steering wheel behave (the clutch and the gear stick too, if one is driving a stick shift), similarly before trading one is required to understand how the market and the stocks behave.

The Secret Math Formula. As scary as this may sound it is nothing more than applying simple high school math of success probability and reward-risk ratio statistics.

The probability here is simply how often a trading bet is correct. Another way to put it would be, based on one’s understanding of the market and the stock behavior, how often does the stock behave as per one’s expectation.

The reward-risk ratio is just the absolute value of average profit (on successful trades) divided by the absolute value of the average loss (on unsuccessful trades). Example:

If the average profit is 10% and the average loss is (-)5% then the reward-risk ratio is 2 (or 2:1). If the average profit is 5% and the average loss is (-)10% then the reward-risk ratio is 0.5 (or 1:2)

One can measure these easily by analyzing one’s past trades from their trading journal either from real trades or paper trades (which is recommended to do first when someone is starting). And one can be a profitable trader if the following simple formula holds.

P: Probability, R: Reward to Risk Ratio

Let’s say the stock behaves as per one’s expectation only 50% of the time. So, the probability (P) is 50% or 0.5 in the fractional form. Let’s say that the reward to risk ratio (R) is 3. Then using the “secret math formula”:

0.5 * 3 — (1–0.5) = 1.0

and since that is greater than 0 and so one will be profitable.

In the above what one can control well is the reward to risk ratio by setting the stop-loss appropriately and taking profit on a timely basis. The probability can also be improved as one gains more experience and studies the market behavior in greater detail.

This is what “risk management” is all about.

The Secret System. This is nothing more than the discipline to do trading following the rules that one set out, in an emotionless way. The biggest reason why people fail in trading is that they bend their own rules and let their emotions override their decisions. The successful traders trust their edge, the math, and understand the simple fact that even the tosses of an unbiased (balanced) coin don’t give heads and tails alternatively just because it has a 50% probability. These tosses may give sequential tails (or heads) but when tossed enough times they will generate an almost equal number of heads and tails. The same applies to trading as well. There could be losing streaks where the stop loss gets hit more often and at the same time, there could be winning streaks where the profit target is hit more often. The key to successful trading is not getting carried away during winning streaks or being scared off during losing streaks to let emotions override their risk management approach.

That is all that it takes to trade profitably without a crystal ball.

And anyone can do it.

Now, having said that, to get the best possible outcome there is definitely a lot of work that a new trader would have to put in to study the market and the stocks’ behaviors to be able to identify the opportunities. Even for an experienced trader, it is quite difficult to identify the best opportunities, from thousands of stocks, that are likely to deliver the highest reward to risk ratio with the greatest probability of success under various market conditions — and do this on a daily basis so as to not only trade profitably but always generate the best possible return. This is where artificial intelligence (AI) can help to simplify these tasks by doing all the heavy lifting in learning the market and stocks’ behaviors and identifying the best opportunities.

Researchfin.ai accelerates the learning and research effort for both new and experienced traders alike. Our AI analyzes billions of data points from market data, financial data, news/web/social media, and other data sources for thousands of stocks and applies technical analysis, fundamental analysis, sentiment analysis, predictive analysis, anomaly analysis, reward-risk analysis, and other approaches to surface the best opportunities with the highest probability of success and the largest reward to risk ratio to buy or sell/short, daily. All these are available at the convenience of your fingertip on your smartphone.