Money Management & Positive Expectancy

A good trading system gives you an edge in the market.
To use a technical term, it provides a positive expectancy over a long series of trials.
A good system ensures that winning is more likely than losing over a long series of trades.
If your system can do that, you need money management.
But if you have no positive expectancy, no amount of money management will save you from losing.

Dr Alexander Elder, Come Into My Trading Room

4 Kinds of Bets in Trading

There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose.

Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you.

You can also lose a good bet no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.

Larry Hite

Source: The 3500

Positive Expectancy & Position Sizing

Your trading style forms a basis for your beliefs about how to enter the market.

This is important because you really only trade your beliefs about the market. It’s very hard to trade something that’s going up if you believe it is overvalued.
Similarly, it’s very hard to trade something that’s considered undervalued, if you believe (because it is going down) that it will continue to go down.

But it really doesn’t matter what framework you select for picking your trades or investments. That’s only the starting point for real success.

What’s really critical is that you understand that you make money by cutting losses short and letting profits run. This will give you a positive expectancy system.

And if you can do it in such a way so as to develop a good system, then you can probably achieve your objectives through the appropriate use of position sizing.

And if you can continue to do this without making many mistakes, then you’ll probably be happy with the results.

These are the real keys to investment success.

Van K. Tharp

Source: IITM Weekly Update

Frequency vs. Magnitude

The irrelevance of winning percentage is nicely summed up by another legend named George (Soros):

It doesn't matter how often you are right or wrong - it only matters how much you make when you are right, versus how much you lose when you are wrong.

Source: Turtle Trader