Introduction to Technical Analysis: Foundation of Professional Trading for Beginners
Hey, how's it going, guys?
Welcome to Module One of Technical Analysis Foundation the complete professional trading course for beginners. Before we start, I have a question for you: can traders truly make consistent money?
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You’ve probably asked yourself this question multiple times. After trading for nine years, I still encounter skepticism from family and friends who see trading as gambling. They view me as nothing more than a lucky gambler, doubting the reliability of trading as a sustainable livelihood. Yet, many traders not only make a good living but also make a significant impact on society. So, it all comes down to this simple question: can traders truly make consistent money?
The Short Answer and the Long Answer
The short answer is yes. The longer answer is yes, but only when you have an edge. This is what **technical analysis** is all about—it’s a tool to help traders find an edge that works for them to make consistent profits in different market environments.
Defining a Trader’s Edge
A trader has an edge if they can identify entry and exit points in the market so that over a large sample size, the total amount earned from winning trades is greater than the total amount lost from losing trades. There are three key points in this definition:
1. Proper Technical Approach**: You need a proper technical approach to tell you when to enter and exit the market.
2. Decent Number of Trades**: You need to make a decent number of trades for your edge to work.
3. Risk-Reward Management**: Your edge isn’t just about having more winning trades than losing trades; it’s also about how much you can make from your winning trades and how much you lose from your losing trades.
Expected Value Formula
When I started learning how to trade nine years ago, I used a formula called the Expected Value Formula or Expectancy Formula.
Here’s how it works:
- *K*represents the number of possible scenarios. In trading, there are only two scenarios: either you win or you lose, so K is 2.
- *X* represents the value of your total payoff in each scenario.
- *P* represents the probability of each scenario.
For example, let’s consider two traders, Trader A and Trader B:
- Trader A* has a 50% win rate. When he wins, he earns $100, and when he loses, he loses $100. The expected value for Trader A on each trade is $0.
- Trader B* has the same win rate, but when he wins, he earns $200, and when he loses, he loses $100. The expected value for Trader B on each trade is $50.
Clearly, Trader *B is the better trader because he has a higher expected value per trade.
Applying the Expected Value in Trading
Just like how casino owners design games to ensure they have a betting edge, traders need to have a trading system with an edge. Your trading system should include two major parts:
1. Strategy Helps you navigate the market, find high-probability trade setups, and determine when to enter and exit.
2. Rules: Determine the maximum amount you can lose per trade and help you execute your strategy without emotional interference.
Real-Life Example
Let’s look at a real-life example with three traders:
- Trader A*: Starts with $10,000 and risks 1% ($100) per trade. With a risk-to-reward ratio of 1:3 and a win rate of 60%, after 100 trades, she generates $12,000 in profit—a 120% return on her original capital.
- Trader B*: Same initial capital and risk per trade, but with a win rate of 30% and a risk-to-reward ratio of 1:3. Surprisingly, Trader B ends up with $2,000 in profit—a 20% return.
- Trader C*: Same initial capital and risk per trade, but with a risk-to-reward ratio of 2:1 and a win rate of 60%. Trader C ends up losing $2,000—a 20% loss.
From this example, it’s clear that the best way to maximize profits in trading is to find high-probability trades with excellent risk-to-reward ratios, just like Trader A.
The Psychological Edge
In addition to strategy and rules, having a psychological edge is crucial. This mental system helps professional traders execute each trade according to their rules without emotional interference. Trading is like driving; experience gives you the confidence to execute trades properly, no matter the market conditions.
The Three Pillars of Professional Trading
1. Trading System with an Edge : Helps you find high-probability trade setups.
2. Asymmetrical Risk-to-Reward Ratio: Ensures you lose small and win big.
3. Consistent Psychological Edge: Supports your trading execution without emotional interference.
As legendary trader Jesse Livermore once said, "Confidence is not I will profit on this trade. Confidence is I will be fine if I don't profit on this trade because I still have my edge."
Find your edge in the markets, trade like a casino owner, and never forget the three pillars of professional trading. Thank you for watching. In the next module, I’ll share some of the most powerful chart reading techniques I use to find my edge in the market. See you in Module Two.
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