“There’s a million ways to make money in the markets, unfortunately they’re all very difficult to find.” – Jack Schwager
Profitability in the financial markets is based on math not predictions and opinions. Here are the ten mathematical paths to profitability:
- Have a high winning percent where your winning trades and losing trades are similar in size. Your profitability comes from the quantity of winning trades.
- Create a reward/risk ratio of 3:1 in your trades where your winning trades are maximized and your losing trades are minimized.
- Trend following where you are bullish in up trends and bearish in downtrends creating profitability by being on the right side of a market trend.
- Trading a systematic process that is back tested to be profitable based on sound principles.
- Buying and holding growth stocks that are the winners of their sector and industry.
- Investing in sound companies with great fundamentals that you can by with a huge margin of safety and hold them long term.
- Buy extreme fear during market crashes or sell euphoria short near the price top in bubbles.
- Sell low probability option contracts with a hedge in place.
- Buy small far out of the money options over and over until you make one big outsized win.
- Trade with a positive expectancy: What is positive expectancy? Here’s a .xlsx friendly formula: Expectancy = ((PW*AW) – (PL*AL))*F Where PW = % Win; AW = Average Win; PL = %Losses; AL = Average Loss; F = Frequency
Note: You have to trade a process that fits your beliefs about the markets. Position sizing also must be structured so you avoid the risk of ruin.Without discipline and self control no trading system will be a profitable one.