Trading is a multifaceted activity that requires a thorough understanding of various concepts and strategies. While the ultimate goal of trading is to make a profit, achieving this goal involves more than the basic principle of buying low and selling high. Core trading concepts encompass probabilities, risk management, opportunity identification, relative pricing errors, and more.

In this first lesson we will delve into the concept of Probability, a fundamental aspect of trading, which includes the Win Rate (Win/Loss Ratio), the Odds Ratio (Risk-Reward Ratio) and the Risk of Ruin (Position Sizing). , bankruptcy rate).

win rate (Win/Loss Ratio):

The win rate in trading refers to the proportion of trades that generate a profit. It is calculated by dividing the number of winning trades by the total number of trades.

For example, if a trader executes 10 trades and 8 of them make a profit, the win rate would be 80% (8 profitable trades/10 total trades = 0.80 or 80%).

If the potential loss and profit on a trade are equal, a higher win rate is generally more desirable. However, it is important to note that a high win rate does not necessarily equate to overall profitability. When the potential loss differs from the potential gain, another concept comes into play: the odds ratio.

Odds Ratio (risk-reward ratio):

This is the relationship between potential profit and potential loss on each trade. A favorable odds ratio, where the potential gain is high and the potential loss is low, can offset a lower win rate, as the gains from successful trades outweigh the losses from failed trades. Conversely, an unfavorable odds ratio can diminish the profits from a high win rate.

For example, let’s say you are trading a particular cryptocurrency and have identified a potential trading opportunity. You have decided that you are willing to risk 100 USDT in this trade because, based on your analysis, you think the price is going to go up. You set your stop-loss order 100 USDT below your entry point. This is the amount you are willing to risk. On the other hand, you set your take profit order 300 USDT above your entry point. This is your profit target. In this case, your risk-reward ratio is 1:3. You are risking 100 USDT for the potential to win 300 USDT.

Ruin Risk (Position Size, Bankruptcy Rate):

This refers to the probability of losing a significant portion of your trading capital to the point where trading becomes unsustainable. The risk of ruin is influenced by factors such as the size of each trade in relation to your total capital, the risk of the trades you make and the number of trades you execute. Effective position and capital management can help mitigate the risk of ruin.

For example, let’s say you have 1000 USDT to trade. If you risk 500 USDT (50% of your equity) on a single trade and that trade results in a loss, you will only have 500 USDT left. If you continue to risk 50% of your capital on every trade, you could quickly deplete your trading capital. However, if you risk a smaller amount, such as 10 USDT (1% of your equity) on each trade, you could suffer a series of losses, but you may not make a significant profit even if the trade is successful.

By deeply understanding these concepts and applying them to your trading, you can improve your chances of success and mitigate your risk of loss. Remember, trading is not a one time event, but rather a long term activity. It is crucial to ensure that, just like in a casino, the odds are consistently in your favor over the long term. The rest depends on discipline and how to identify opportunities where the odds are on your side.