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Profitable Trading System

We would like to discuss the importance of mastering the execution of a profitable trading system, which is the second secret of professional traders’ success!

As we discussed earlier, a professional-minded trader understands that success in market relies heavily on the development of skills rather than knowledge
However, before mastering any process or algorithm, a trader needs to assure that these skills are part of a well-designed profitable trading system.

This is similar to acquiring driving or flying skills, as one needs to practice using a safe and well-designed vehicle or airplane. All parts of the vehicle need to work smoothly together and be fully functional, in order to ensure its robust operation.

Therefore, it is important to fully understand the characteristics of a profitable trading system, which acts as a vehicle to gain consistent profit for many years.

A profitable trading system is known to have an “Edge”. This means it will make more money than it loses in the market in long term.

A profitable trading system have “Positive Expectancy”, which is calculated using following formula:

Expectancy =  (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

The edge of a profitable trading system is derived from the combination of a higher winning rate and average wins/average losses ratio.

A positive value (greater than zero) means that the trading system is profitable and has an edge, and a negative value (less than zero) means that the trading system is non-profitable and offers no edge.

How do you find your trading system's edge? Use historical statistics and the Expectancy Formula!

In this example from our website, we see that a trader who has started to master the PPAT (Price Psychology Algo Trading) system, has a track record of a 70% win rate, with an average profit of $150 and average loss of $100 trading S&P 500 e-mini futures, which generates a strong positive expectancy of $75.

(Probability of Win * Average Win) - (Probability of Loss * Average Loss)
(0.70 * $150) - (0.30 * $100) = $75

How do you achieve a long-term success in the market?

In conclusion, the development of trading skills requires continuous practice using a system that is profitable in the market. For a long-term success in the market, a trader needs to master execution of the process and decision making algorithms of such a system, which will be discussed in the next video.

Master Process/Algo