Know the Probabilities of Success – Be The House
I think there is a bottom in place now. I dipped my toes back in today after missing Friday’s carnage. Seeing the strong bounce back today after so much selling is giving me good feelings that my next set of trades will be winners, they have certainly started off that way.
They say volatility is here to stay, but the truth is nobody knows, so we can only trade the market we see in front of us and ignore the fear of loss, as it’s just an emotion the doesn’t serve us.
In fact, in trading, fear is an illusion, even after a period of losses, it’s important to remember that nothing has changed from the probabilities of success. The probabilities being the three most important stats in any system:
- Have a low drawdown %
- Know your % Win v loss ratio (our being around 55% winners/45% losses)
- And know the average size of winners v losses (our winners are on average 3 times the size of our losses over any period in time).
We must think like the house, we must be certain we will win over time, certainty comes from knowing the rules, and the rules are based ONLY on high probabilities. It’s just plain old math.
The thing is, there is no straight path to success, not any great success anyway. There is also no holy grail. All systems have to take losses. They just have to be small. Anyone that opens themselves up to large losses is just not playing the game to win. The winners know when and where to take a loss, which by and large is the reason most people fail at trading, as the quote says: You must first be a successful loser, before you get to win.
Market News:
U.S. stocks closed sharply higher on encouraging news from the Eurozone and stronger oil prices.
The Dow Jones Industrial Average surged 200 points in the minute before the close. In a “double-triple move,” the index gained 100 in late morning trade after earlier falling more than 120 points on weaker-than-expected ISM figures.
For much of the day stocks struggled for direction amid weaker-than-expected ISM figures and firming oil prices.
The late-afternoon rally pushed the S&P 500 above the key 2,000 level, which Cardillo and other analysts were watching for on the first day of February trading.
U.S. crude closed up at $49.57 a barrel, the highest in nearly a month, after touching an intraday high of $50.56 and slumping to $46.67 in Asian trading.
Energy led gains on the S&P 500, closing up 3 percent. Telecommunications followed closely behind, ending the day up 2.43 percent.
The ISM manufacturing index hit 53.5 in January 2015, below expectations of 54.5, the weakest reading since January last year.
Exxon Mobil reported earnings that beat expectations but were lower than the year-ago quarter.
Eighty-five S&P 500-listed companies are posting quarterly results this week, along with three Dow components.
U.S. consumer spending recorded its biggest decline since late 2009 in December, with households appearing to save the extra cash from cheaper gasoline, which could support future consumption.
Asian data out earlier showed that manufacturing activity in China is still contracting. China’s final HSBC Purchasing Managers’ Index (PMI) fell to 49.7 in January, a touch below its 49.8 flash reading. The 50-point mark separates expansion from contraction.
Greece’s new left-wing government began what one analyst called a “charm offensive” on Sunday, in an effort to persuade its euro zone partners to soften the terms of its international bailout. The government has already started to reverse austerity measures unpopular in Greece that were a condition of its current bailout agreement.
Tuesday:
Earnings: BP, LVMH (Louis Vuitton MoetHennessy), UPS, Aetna, Archer Daniels Midland, AutoNation, Gannett, NY Times, Disney, Gilead Sciences, Aflac, CH Robinson, Chipotle Mexican Grill, Edwards Lifesciences
10:00 a.m.: Fed’s Bullard speaks
10:00 a.m.: Factory orders
12:45 p.m.: Fed’s Kocherlakota speaks
News Sources: CNN Money & CNBC