Solving the ‘’Trading Equation’’
Marios Stamatoudis
Marios Stamatoudis is a swing trader and top performer in the 2023 US Investing Championship, with a 291% return. He focuses on momentum and high-growth opportunities.
Published: September 5, 2024
Whether you’re day trading, swing trading, or position trading, every trading style’s edge is an equation that consists of around 8 strong parameters. These parameters determine your overall success in the market, your peace of mind, the wins, the drawdowns, and the smoothness of your equity curve.
8 Parameters That Determine The Trading Equation
This framework is really useful for new or struggling traders who are still trying to find their edge and foundation. Even if you are profitable, this could help you adjust some things and build a more resilient system.
Selection Criteria
The stocks you buy. This is your filtering process—what makes a stock worthy of your attention and capital.
Technical & Fundamental Data
The reasons you buy these stocks. Your analysis process that validates why a stock deserves a position in your portfolio.
Position Size
How many shares you buy. Your position sizing strategy determines how much capital you allocate to each trade.
Setups
When you enter. Your specific entry criteria and the patterns or conditions that trigger a buy.
Selling Rules (Partials)
When you sell. Your rules for taking profits, including partial position exits as a trade moves in your favor.
Stop Loss / Exit Rules
When you exit. Your predefined points where you cut losses or exit a position that isn’t working.
Win Rate
The number of working trades. The percentage of your trades that end up profitable.
Profitability
How much they can go up %. The magnitude of gains on your winning trades.
If we look at this really simply, the first equation we can come up with would look like this:
The Secret to Trading Success
In trading, there are certain things you have full control over and others you have completely no control over.
Parameters A through F
- Selection Criteria
- Technical & Fundamental Analysis
- Position Size
- Entry Setups
- Selling Rules
- Stop Loss / Exit Rules
Parameters G and H
- Win Rate
- Profitability %
These are market-dependent and random over any given period.
Some traders, though, put a lot of priority on the last 2. And priority means “Weight.” So the real equation is an enhanced version of the previous one:
(Where w1, w2….w8 are the weights in each parameter)
Critical Warning: If you put a lot of weight on the last 2 parameters that are random and market-dependent, you are doomed to fail in the long run.
Because the results of your foundation edge will fluctuate so much that you will never be able to get a grasp or gain confidence. This is not a maybe thing; that is a sure thing.
If you put equal weight among all the parameters, you are going to struggle in a lot of market periods. Understanding this distinction is essential for building the right trading psychology foundation.
The Magic Sauce: Prioritizing the Right Parameters
So, what is the magic sauce here? How can you gain an edge over the last 2?
When you are building your foundation, you should absolutely maximize and give priority weight to the first 6 parameters and less weight on the last 2. How do you maximize the first 6?
How to Maximize Parameters 1-6
- Refine your selection criteria
- Refine your technical skills and fundamental reading methods
- Refine your entries
- Refine position size
- Refine your selling rules
“That is the only way your foundation can remain solid in the long run, that’s the only way you can get a grasp in the market, that is the only way you can succeed in the long run.”
When you are building your foundation, you should build it in a way to put up with extreme pain and randomness because it is 100% certain that you are going to get enough pain and randomness in different periods. The systems that put a ton of weight on the first 6 parameters are the ones that have the best survivability edge over the long run.
This approach aligns with the core trading principles that separate successful traders from those who struggle.
Build your foundation so that, regardless of what happens within yourself (your thinking, your emotions) and in the market (bear markets, choppy markets), you can still stay strong, remain confident, and maintain an edge!
Note: The above equation is not meant to be used as it is. There are no numbers in it. It is an “example” to showcase the importance of building your foundation around what you can control. It is an example to better deliver the core message of this article.
Key Takeaways
Build Your Trading Foundation
Learn directly from Marios Stamatoudis—2023 US Investing Championship top performer with a 291% return. Master all 8 parameters of the trading equation with a proven system.
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