Can an investor become a trader?
It should be possible. Yet, how many folks do you know that succeed at both?
Not many, we presume.
Investors and traders are as different as apples and kumquats.
It is as if there’s some inseparable barrier between the two, preventing either from stepping into the other’s world.
But what if all it took to slide from the world of investing into trading was a simple formula you learned in middle school?
Surely it can’t be THAT EASY.
We’ll make you a deal then.
Our newest Eagle gurus, Hugh Grossman and Ahren Stephens of DayTradeSpy.com, are holding a LIVE WEEK-LONG OPEN HOUSE from 9:15 to 10:30 a.m. Eastern Time, April 17-21, 2023…
…AND IT WON’T COST YOU A DIME!
Sign up for the event and bring along our simple formula.
Listen to what Hugh and Ahern have to say. Then, apply the math.
We will eat our shorts if you don’t have one of those light bulb moments.
Are you ready?
Let’s start with a simple illustration — a coin flip.
We all know there’s a 50% chance of heads or tails coming up.
Say we offer you $1 for every correct guess, and you lose $1 for every incorrect one.
You keep things simple and pick heads every time.
Imagine we did this 1,000,000 times in a row. How much money would you win or owe?
Since heads appears 50% of the time, you’d win 500,000 of the flips and lose 500,000, leaving you exactly where you started.
The average outcome for this experiment is known as the Expected Value.
This can be expressed by the following equation:
Expected Value = (% odds of winning x potential profit) – (% odds of losing x potential loss)
For the coin flip example you would get the following:
Expected value = (50% x $1) – (50% x $1) = $0.50 – $0.50 = 0
Now, let’s take this a step further.
Instead of $1 for every win or loss, we now offer you $10 for every win, and you pay $9 for every loss.
The equation comes out as follows:
Expected Value = (50% x $10) – (50% x $9) = $5 – $4.50 = $0.50
That tiny change now means that if you made this same bet enough times, eventually, you’d win $0.50 on average per round.
Now, let’s apply this to the market.
Historically, the stock market closes higher than it opens 51.6% of the time.
If you bought the open and sold the close every day for the last 30 years, your average win would be $103.54, and your average loss would be $109.46.
Plugging that into the equation, we get the following:
Expected Value = (51.6% x $103.54) – (48.4% x $109.46) = $53.43 – $52.98 = $0.45
This simple strategy turns a profit, albeit a very, very small one.
Nonetheless, it gives us a foundation to understand how all trades work.
Trading is an exercise in probabilities.
Every trade is a bet that wins and loses a certain percentage of the time. The key is that the outcomes aren’t random.
When you take a trade, you choose your entry, profit target, and a stop where you would cut your losses.
But here’s the secret that NO ONE tells you…
You cannot control the outcome.
All you can control are the decisions you make.
It is like a game of cards, such as poker. You make bets based on the information you have at that moment. But you have ZERO control over what cards come out.
Traders always assume the outcome is a consequence of the decisions you make. That’s only true over time, not for any individual instance.
It would be like saying that heads is more likely to appear after it lands on heads five times in a row.
This is what’s known as the gambler’s fallacy.
Past events do not dictate nor influence the future.
As a trader, you are a tiny, tiny part of the market with no influence on the whole.
However, as we said before, you CAN CONTROL the decisions you make.
And that’s where things get interesting.
Imagine you buy Apple at $160. You expect it to go to $170 but will only let it drop as low as $150.
This makes your potential profit and loss both $10 per share.
Immediately, we know that if we can win this trade more than 50% of the time, on average, we will make money.
Seems simple enough.
But here’s a curveball most people don’t expect.
Let’s say the trade has a 50/50 shot of success so long as you enter the stock between $158-$160.
The problem is if you wait for that $158, you’ll only catch the trade one-third of the time, but if you buy it at $159.50, you’ll catch it every time.
We know buying Apple at $159.50 will make money over time. However, you may not realize how much you give up instead of waiting for $158.
To the equation!
Here’s the expected value for a buy at $159.50:
Expected Value = (50% x $10.50) – (50% x $9.50) = $5.25 – $4.75 = $0.50
Now, here’s the expected value if you wait until $158:
Expected Value = (50% x $12) – (50% x $8) = $6 – $4 = $2.00
The expected value for a buy at $158 is 4x higher than if you buy at $159.50.
And since you catch 1/3rd of the trades if you wait for $158, you could do three trades at $159.50 and make $1.50….or….you could wait for $158 and make $2.00.
Pretty neat, right?
Okay, here are the caveats.
First, everything we described here relies on the AVERAGE outcome. That means you need to take a trade with similar parameters of win percentages and potential profits and losses over and over.
That’s why many traders take a lot of small bets that turn a profit on average over time.
Second, you can’t just waltz out there and find trading setups or patterns that aren’t random without knowing what to look for and what you’re doing.
Remember when we talked about that LIVE WEEK-LONG OPEN HOUSE?
These guys will teach you how to identify these patterns that repeat over and over.
So, if you’re ready to take your game to the next level, then bookmark and save this email, as well as click the link below to sign up for some serious trade education.
