≈ Numbers don’t lie. ≈
The Law of Large Numbers states that the average of the results obtained from a large number of trials should be close to the expected value, becoming even closer as more trials are performed, i.e., as the sample size grows, the mean will get closer to the expected value of the whole population.
The classic approach to explain this probability theory is using the coin flipping example. You got a 50% chance of either get heads or tails. The more you toss the coin, the closer you get to the 50% expected value. The first toss might give you heads. The second one too. And the third. But as you keep trying, say 10,000 times, you will get 4,990 heads, and, therefore, 49.90%.
The key here is long-term consistency.
Now, replace the coin flipping with trading. You enter a position that has a 90% POP (0.10 Delta ≈ 10% Prob. ITM). You get the point: the more you trade, the more the mean of your sample size will get closer to the expected value of the whole population (90% POP). You might lose the first, the second and the third rounds. That doesn’t change the fact that the trade has a 90% POP. You can keep trading as long as you don’t lose your shirt during the first rounds. That is the essence of money management.
≈ If you are pushing the edge, eventually you find the edge. ≈
Chart of the Day
Distribution Analysis
Never try to predict the future, instead, think about it in terms of probabilities. A histogram like this can be developed from your trading system to give you an idea of how the future might turn out. A simple reading you can do: If most of your trades are gathered to the right side of the charts (after the 0.00% mark), you’re doing fine.
Video of the Day
Free Solo
A stunning, intimate and unflinching portrait of free soloist climber Alex Honnold, as he prepares to achieve his lifelong dream: climbing the face of the world’s most famous rock: the 3,200ft El Capitan in Yosemite National Park. Without a rope.
Today’s Lineup
OPTIONS THEORY
The Risk-Free Rate
Interest rates are a big deal. To borrowers they represent a burden that must be borne if they want to purchase big ticket items like a house or car. Low rates are loved and high rates are loathed. When I bought my first house in 2008 my mortgage rate stood north of 6%. Now it’s under 4%. Falling rates freed up hundreds of dollars a month for me and millions of other homeowners. And I have the Fed to thank for the savings.
Traders Lounge 11am EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Cashflow Club Replay
If you missed last night’s episode where Coach Mark talked about technical signals or would like to watch it again, check it out here.
Halftime Report 12:30pm EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Market Recap 4:30pm EST
The Market Recap is designed to give you a quick overview of the day that was. While brief, this report is designed to cover all of the major events that drove the markets that day and help you plan for the trading day ahead.
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