Let’s flip a coin…
If it lands on heads, then I win $1. Tails, you win $1.
That’s a fair bet. We both have a 50% chance of winning.
And if we play 100 flips, you’d expect to walk away with $50. But I don’t like to play fair…
Who Has the Upper Hand?
What if we flipped a special coin that would land on heads more than half the time? Or how about instead of getting $1, I’d get $2 for every winning flip of the coin?
If I came to you with these proposals, you’d rightfully tell me to get lost. This is a simple example of how most people would assess and manage risk.
But things can get complicated quickly…
What if you came back to me with a counteroffer? Let’s say we’d flip a special coin where I’d have a 60% chance of winning every flip.
But in exchange, you would win $2 every time the coin lands on tails. Now it’s much less clear who has the upper hand.
But this is just a coin flip game… Trading the markets is more complicated. And it’s no wonder traders have so much trouble being profitable.
That’s why today, we’re going to continue the conversation around having an edge in your trading…
How To Calculate Your Trading Edge
First, I’m going to share a simple formula that’s going to tell you whether you have an edge or not…
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Edge = (win rate x average win value) – (loss rate x average loss value) |
We can use this formula to see who has the upper hand in that last scenario I described from the coin flip game.
Remember, I have a coin that wins 60% of the time. Each winning flip returns $1. You have a coin that wins 40% of the time, but each winning flip returns $2.
Now let’s plug those values into the formula…
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Edge = (60%-win rate x $1) – (40%-loss rate x $2) = – $0.20 |
So in this case, I don’t have an edge.
Meaning, if we played 100 flips of the coin, you would walk away the clear winner. In fact, on average, I should expect to lose 20 cents per flip.
You can apply this same formula to your own trading. But here’s the difference between flipping a coin and trading…
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Free Trading Resources Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
Risk Management Is a Trader’s Best Play
You have much more control over your trading than you do flipping a coin.
Traders are fully in control of when they decide to take a risk, how much they’re willing to risk, and when to take that risk off the table.
That’s why risk management is the key to successful trading.
If you want an edge as a trader, then you need to make sure that formula is producing a positive number.
If you have a negative edge, then there are only two variables to look at…
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Your win rate.
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The value of your average winning trades relative to your losing trades.
Developing a trading edge is hard work… I’ve spent over 14 years perfecting mine.
That’s why I’ve created a trading advisory service to help traders of all experience levels benefit from my strategies and recommendations.
But Currency Trader is much more than just a profit-generating machine…
Members receive regular video breakdowns and commentary on the forex market. And I frequently provide in-depth answers to your most pressing questions.
I walk you through every trade from start to finish with the goal of helping you find your own trading edge – all through the lens of my own proprietary trading plan.
So far, we’ve scored 15 winning trades out of a total of 16. If you’re seeking an upper hand in today’s volatile markets, I encourage you to join me for the next trade.
To learn more about Currency Trader, just click right here.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, a couple of Jeff Clark Trader members share their experiences…
Hi Jeff,
Although I’ve been a member of one of your services for about 10 months, I had not taken one of your live option picks until I watched a video of your son jumping into action and profiting.
I bought the GDX calls about a month after you recommended and just sold today, which was about a 220% gain. Thank you for a great pick!
– Craig M.
I saw the show/tell demonstration with your son on how to do an option trade. Thank you, a lot. I even chose Fidelity for me. I’ll pick up with you in the new year.
– Joseph B.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.