Edge is math
Whether your trading works is not a feeling. It is 2 numbers, win rate and reward to risk, and the break-even line between them.
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In this video
- Neither number means much alone: a 90% win rate can lose money, and a 35% win rate can be very profitable.
- The break-even line: with a reward to risk of 1 you need to win half your trades, with 2 one in 3, with 3 one in 4.
- Random trading lands on the line, and spreads and fees push it below, so an edge is whatever lifts you above it.
- Test before you trade: exact rules, a log of past charts, then a demo account, and no tweaking until the past looks perfect.
Next video · Core valuesMindsetExecution, not effort1:38The market only pays for what you do.
Key terms
- Win rate
- The share of trades that make money. On its own it says little: a 40% win rate can be very profitable with the right risk to reward.
- Risk to reward
- How much you can win compared with how much you risk. At 1:2 you aim to make 2 for every 1 you risk.
- Edge
- A repeatable advantage that makes money over many trades, proven by your own records rather than by a few wins.
- Backtest
- Testing a set of trading rules on past charts to see how they would have worked.