Stock Trading Quick Tip: The Math Trap
It's clay trader from clay trader calm sorry about the beard I live in Michigan I don't live up in the mountains I know I kind of look like a mountain man right now but when you're your own boss and trade from home you can show you whenever you want to what I want to do in this lesson is just talk about a very simple concept not necessarily simple but it's one where you know I'm an engineer divide agree I went through for calculus classes I took differential equations in college and yet when I first started with trading I missed this very crucial mathematical concept that is vital for risk management and just managing your money and really kind of motivates you to stay disciplined with those stop losses so I want to start off by just drawing a box up here well let's just really this is just a trade don't mind my childish handwriting so right here represents a trade a very nice rectangle you buy a pair and then the price goes down here now in order for you to get back to break-even the price just needs to travel the same distance back up here right hopefully you're saying wait a minute no that's that's not right or if you're sitting there saying wait why isn't that right well that's the whole purpose of this video and what I want to get across like I said not rocket science I'm not proclaiming to be a genius or secret strategy but something that's very pivotal for your risk management now why is this the case well let's say this was ten let's add some numbers to this and this is going to help you hopefully see because when it comes to charting or when it comes to trading I should say distance does that not matter this could be a candlestick and if you're sitting here thinking well if the candlestick you know creates this distance and then bounces back up you're back to break-even well you're not looking at the right thing you're not looking at the math so 10 and then let's just say it drops down to 5 on you this right here would be a 50% loss because everybody followed 10 to 5 50% loss now this is 5 again and this is 10 up here looking at it mathematically 5 to 10 so this distance what is the price after now travel from a percentage standpoint 100% so hopefully you're seeing the issue here and why you shouldn't be looking at it as just okay the prices dropped from here to here now I just need to travel the same distance back up mathematically that's not the case it's got to do more work to go up so picture this as like a big stone rolling down a hill stones rolling down the hill no problem but when a stones got to get pushed back up the hill you got to use a lot more effort and that's what's going on here with the math a lot more effort to recover any sort of losses so why is this so important well from a risk management perspective you don't want things to get out of control on you it may not look too bad from a distance perspective but from a mathematical perspective it can turn against you very quickly and the numbers are I guess not your friends the numbers are not in your favor when you begin to take losses and let them expand on you so really get that you know suck it into your mind understand this concepts crucial for managing risk and you need to factor it into all of your planning if you're trading you better have a plan before your another trade and this is a vital little component yes little one that big one that can be overlooked though a lot especially if you're just getting started so keep this in mind the numbers are not your friends it's easy for a rock to roll down a hill but when you need to get that rock back up the hill a lot more effort is required thanks for taking the time to watch this video hopefully you learned something maybe it was a little bit basic for you but if you like the style and how it was done I'd encourage you to check out some of my more advanced courses if you go up into the training store you'll be able to see I offer things charting both beginner up to more advanced concepts and then level twos all sorts of stuff for the trader and four ways to get a limit or eliminate your motions from your trading so check that stuff out if anything though recent testimonials and you know get a good third-party perspective or you can get a hold of me on Twitter Facebook or submit our contact form up in the top bar of the website and you know drop me any questions you may have and I'll do my best to answer them and get back to you in a timely fashion thanks again for watching have a good one you,
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