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Risk Taking

It was better to risk taking many small losses than to risk missing one large profit.

In order for this to work, you must have a trading edge. Without which, you are taking unnecessary risk. Trading is like gambling. You want to know your edge first.

You need to calculate your edge for every trading decision you make, because you can’t make “bets” if you don’t know your edge. It’s not about the frequency of how correct you are; it’s about the magnitude of how correct you are.

For winning edge to happen, the expectancy of the trades must be positive:

E = (PW x AW) - (PL x AL)

Where:
E = Expectation or Edge
PW = Winning Percent
AW = Average Winner
PL = Losing Percent
AL = Average Loser
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