Solving the ‘’Trading Equation’’

Marios Stamatoudis
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.

September 5, 2024
3 min read
537 views

Today, I’ll write about something that I feel is really useful for new or struggling traders who are still trying to find their edge and foundation around things. The Trading Equation. Even if you are profitable, this could help you adjust some things.

No matter if you are Day Trading, Swing Trading, Position Trading, etc., 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. So, what are these parameters?

8 Parameters That Determine The Trading Equation

  1. The stocks you buy (Selection Criteria)
  2. The reasons you buy these stocks (Technical Data & Fundamental Data)
  3. How many shares you buy (Position Size)
  4. When you enter (Setups)
  5. When you sell (Partials, Selling Rules)
  6. When you exit (Stop Loss or Selling Rules)
  7. The number of working trades (Win Rate)
  8. How much they can go up % (Profitability)

If we look at this really simply, the first equation we can come up with would look like this:

Foundation’s Edge = A + B + C + D + E + F + G + H

The Secret to Trading Success

In trading, there are certain things you have full control over and others you have completely no control over. No matter how many times you go through these parameters, you will see that you can have control of A, B, C, D, E, F, and you have zero control over G, H.

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.

The Real Equation:

Foundation’s Edge = w1⋅A + w2⋅B + w3⋅C + w4⋅D + w5⋅E + w6⋅F + w7⋅G + w8⋅H

(Where w1, w2….w8 are the weights in each parameter)

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; I’ve been there in my early years. If you put equal weight among all the parameters, you are going to struggle in a lot of market periods.

The Magic Sauce: Prioritizing the Right Parameters

So, what is the magic sauce here? How can you gain an edge over the last 2?

The answer is you simply can’t, so you should not rely even a bit on them. 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? You refine your selection criteria, you refine your technical skills and fundamental reading methods, you refine your entries, you refine position size, you 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.

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!

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.

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