Strategy vs. tactics and the 3 truths of trading

Why you don’t need to know what’s going to happen next to make money.
And 3 more indisputable truths about trading…
 

Let me tell you all you need to know about successful trading…

It’s best to look beyond the markets themselves for the perfect model, so put any aversion to gambling you have to one side for just a moment, and picture yourself walking into a casino…

You’ve got a fistful of cash in your hand and you plan to make yourself a nice tidy bundle – around £5k would do nicely, don’t you think? After all, you did it last month. Strategy vs. tactics and the 3 truths of trading

In fact, this is how you plan to support yourself on a permanent basis from now on. It seems so easy!

So what do you think your chances of doing your £5k month-on-month actually are?

It’s possible I suppose. But it’s no long-term plan for financial stability is it? It would only be a matter of time before your luck ran out. Because you know in your heart of hearts the house has the odds stacked in their favour.

Now imagine walking through a different door…

This time you walk through the staff entrance round the back and ascend the stairs to your plush office that overlooks the gaming floor through one-way glass… because you own the casino!

What are the chances of that same roulette table making £5,000 for you now? It is 100% guaranteed. A mathematical certainty. It’s only a matter of time before your edge in probability pays off because the odds are always stacked on your side.

The way the roulette wheel is designed means the house always house a 2.7% edge over the gamblers. That’s for a European table. And the odds on a US table are stacked even further in the casino’s favour, to the tune of 5.26%.

Now that might sound like a very small advantage but it accounts for millions in profit. It’s why the casino industry can afford to spend a small fortune attracting gamblers to their fancy resorts – why they have all those big-name entertainers performing night after night.

They know they cannot fail to make money so they are interested in one thing and one thing only – getting as many punters as possible through the doors to keep those roulette wheels spinning and the betting chips flowing. (In their direction of course!)

They’ve got it down to such a fine mathematical model that any anomalies straying too far from their expected returns almost immediately flag-up something dodgy. It could be a croupier on the take, or a wonky roulette wheel where some bright spark has figured out which numbers come up more often than the others. But their model lets them spot it soon enough.

So, even though a small sample size of results – a string of wheel-spins – may return a random pattern of wins and losses for the house, over the long run they know the odds will always work their way back to the expected 2.7%.

That’s 2.7p profit for every pound that is staked at the table. And imagine how quickly that racks up over the course of an evening!

So what’s the big lesson we can take from the casino operators? It’s this…

The secret of successful trading is to always keep the laws of probability on your side.

Forget about trading for high levels of accuracy. You don’t need to worry about it. You should expect to take some losing trades along the way, just like the casino will have to pay out the gamblers to some degree on almost every turn of the roulette wheel.

The big secret is to always to think like the house instead of the gambler. Keep the odds tilted in your favour and you’ll always make profits in the long run. In fact, let me quickly remind you of three simple rules that can keep you thinking accurately…

3 truths of trading

1) You don’t need to know what’s going to happen next in order to make money. It means there’s no need for crystal balls or magical ‘never lose’ trading signals!

2) You will experience a random pattern of winning and losing trades. It’s one of the paradoxes of trading that a series of seemingly random results can still boil down to a predictable outcome over a large enough sample size. The key, of course, is keeping yourself in the game for the long term, giving time for the odds of success to fall into place predictably.

3) Profit is made simply by gaining more money on your winning trades than you give back on losing trades. You can have trades that make big potential profits ‘only’ around 50% of the time and make a fortune. You can have trades that ‘win’ 90% of the time and you lose your shirt.

The strike rate of winning trades means nothing on its own: it’s all about how much your batches of winning trades make when compared against the losses incurred by your batches of losing trades. That’s the calculation you need to keep your eye on.

Now it’s so much easier to trade a strategy with a high reward-to-risk ratio on winning trades. It means you don’t have to maintain super-high levels of accuracy to make money – you’re not held hostage by that high strike rate. In fact, seek large enough profits and you can even make the odd mistake, it’ll hardly even scratch the surface of your results.

But how would you go about finding a way to do this that keeps the laws of probability on your side? How could you take a leaf out of the casino’s book and steal an edge for yourself?

I think there are two aspects of such a campaign that you’d need to consider…

First of all, you’d need to take a STRATEGIC OUTLOOK.

If you’re looking for your trades to run on for multiple times reward over initial risk, you need to be trading along the path of least resistance: you’d need to position yourself so the natural flow of the market could carry your trades along effortlessly.

Think like a surfer – you want to spend your time riding the waves in to shore, not facing the wrong way and have huge waves come rolling in to pummel you down to the ocean floor!

So for me, a strategic outlook means using an analysis of trend of some description to take a high-probability directional bias in the market.

Once you’ve got that in place – and only once you’ve got that in place – you can start thinking tactically.

TRADING TACTICS is a secondary consideration.

Now this is what most traders naturally gravitate towards straight away, but if they took the time to get the strategic outlook in place they’d be taking a much more effective and profitable edge into battle with them.

Trading tactics is the nitty-gritty finding of trade entry points. It’s the identification of stop loss locations and management of trade exits. It is important stuff but it can be elevated to whole new levels of effectiveness when tagged onto the directional bias you take from a strategic outlook.

And the great thing is there are so many ways of achieving a strategic vision and coupling it with cutting-edge trading tactics. In fact, there are as many ways of doing it as there are traders in the market – but unfortunately not all traders have spotted the opportunity.

So are you combing big-picture strategy with low-level tactics on your own campaigns?

Would you like to learn more about doing it in an effective and profitable way?

This Thursday (21 May) I’ll be inviting 150 traders to join me in the Trader’s Nest Forex Breakthrough Academy, where I’ll be training you to do exactly this.

You can go from a standing start and get absolutely everything you need to commence analysing the markets with a strong strategic outlook. You’ll then get all the direct tactics that’ll let you unleash your high-probability trades on the market.

Keep an eye out for my emails hitting your inbox on Thursday morning and I’ll tell you all about it.

Be Prepared: Market Moving Data Coming This Week (London Time)

Wednesday 20th May
09:30    GBP    BoE Meeting Minutes
19:00    USD    FOMC Meeting Minutes

Thursday 21st May
08:30    EUR    German Manufacturing PMI
09:30    GBP    Retail Sales
15:00    USD    Existing Home Sales
15:00    USD    Philly Fed

Friday 22nd May
07:00    EUR    German GDP
08:30    EUR    German Manufacturing PMI
09:00    EUR    German IFO Business Climate
13:30    USD    Core CPI

Monday 25th May
– no big reports

Tuesday 25th May
13:30    USD    Core Durable Goods
15:00    USD    CB Consumer Confidence
15:00    USD    New Home Sales

Don’t forget to keep your eyes peeled for details on the Trader’s Nest Forex Breakthrough Academy this Thursday – I’d love to show you exactly how to do this stuff. I’ll be catching up with you again very soon.

Until then, happy trading!

P.S. Registration for the Trader’s Nest Forex Breakthrough Academy will open on Thursday 21 May at 11 a.m. There are only 150 places available, so set yourself a reminder for that time if you’d like to claim one.

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