Irrefutable Law of Trading Success #1: Jackpots Solve all Your Problems

This is rule number one of the 10 Irrefutable Laws of Trading Success: Jackpots solve your problems. Shat is a Jackpot? Jackpot is just another way of saying a big R winning trade, it's like going to the casino and pulling a slot machine and hitting it big or placing a bet and hitting it big. A jackpot is when you get the jackpot with all the coins and you just kick ass. It's fun, right like so, ironically jackpots solve your problems in trading. We're going to talk about this today. Of the 10 laws, this one is by absolutely the biggest factor. Especially if you are more of a retail trader. You're more of a slow trader. You're not day trading. You're not a market maker. You're just making trades like you're a swing trader. This is massive for you. You have to find trades that have really good reward to risk ratios and one other thing I would say is that any great trader is always aware of the reward to risk of every trade they make and they have certain thresholds that they will never, ever violate. It doesn't matter how strongly they feel that a stock is gonna go up, that NVIDIA is gonna go up. If it does not meet the reward to risk criteria, they skip the trade. Now, when I go through and I analyze students of mine trading records, especially new students are coming to me. Somebody might be established trader already and they're asking me to work with them and consult with them. One of the first things I do is I asked them one, are you recording what the reward to risk is on every trade? A lot of traders don't even do that. They can't even get to number one. But then when they do, I'll just go through and I'll sort it. I'll sorted by the anticipated reward to risk at the time they took the trade. In almost always what I'll find is that the trades that they go for a bigger gain, they think they can make four times, five times, 10 times their risk. Those are their best trades. Always. So let's talk about this. 

Recently, I was asked to participate in a LinkedIn group that had this question: how can you use technical analysis to find high probability trades? They want everybody to weigh in on this. This is the classic question. This is a classic question that every technician and every trader asks. But notice my answer, this is the wrong question. It's the wrong question. Everyone pushes, everyone pursues high probability strategies, and they doom themselves to mediocre trading in the process. Creating SAVs with superior reward to risk is the road to great trading, not high probability. Everybody's like how can I get my win rate up? Wrong question. How can you get bigger wins? This is the question you should be asking. So let's just talk a little bit what is a jackpot? A jackpot is a trade that you make three times or more your initial risk. So you won't ever take a trade that's less than three times your initial risk. Money management trumps market selection and trade selection. Money management, ie your reward to risk rules, trump any other setup. You can have the best setup in the world and hottest market in the world and if it fails, the reward to risk check, it's out. Dr. Van Tharp, who I was very close with, one of his core principles is that you need large wins to be a great trader. I don't know anybody who's a great trader that does not have large wins and the threshold is a minimum of three R or greater as a potential profit of your trade. We already covered this large winning trades, not win rate. Large winning trades are the secret sauce of great trading. My friend Paul Tudor Jones, lives by this axiom. He looks for five to one and his reward to risk, five to one means I'm risking $1 to make five. What five to one does is it allows me to have a hit ratio or win rate of 20%. I can actually be a complete imbecile, I can be wrong 80% of the time, and I'm still not going to lose. If you only take trades that were five to one and you were wrong 80% of the time, you'd still make money. I know for a fact with Paul, that he never ever takes a trade on here 4R, ever. 

This table, I love this table because it to me it really made drives home the point we're trying to make here. So this essentially shows the reward to risk ratios for different trades and essentially, at the reward to risk you choose, what is the breakeven rate? So notice if I have a system that I risk $1 to make 50 cents. I have to be right two thirds of the time to break even. If I take a system that I make three quarters, I make 75 cents for every dollar risk, I have to be right 58% of the time. If I take one to one, where I'm making one to risking one, I have to be right half the time. This is all to breakeven. We use 25 cents as essentially like the minimum threshold and expectancy for a system to be tradable. I want you to notice that if you are in a system that you are willing to risk $1 to make 50 cents, at 80%, if you're right 80% of the time, it still does not qualify, it still does not qualify as a tradable system. Now 0.75 to one at 80%, you finally start to get there, it's 40 cents. At one to one, you get there at basically just over 60%, like 63%. But the thing I want you to notice as you can see this as heat mapped. The bigger the reward to risk you pursue on all of your trades, the higher your expectancy. We said three to one right? Three to one, you will only gonna to take a trade we can make three times our risk. Well, we only have to have a 25% win rate to break even at three to one. In those, a 35% win rate which is not that great, we have a 40 cent expectancy, which is good, it's totally tradable. At 40%, is 60 cents. At 50%, it's a buck, you start getting over 50 cents, you can get really rich, you can get rich and expectancy over 50 cents. If you have any kind of frequency and you're over 50 cents you're gonna get rich. Well notice if I go and we just said we're Paul and I'm only right 35% of the time at five to one. My expectancy is $1.10, which is amazing. At 50%, it's $2. These are crazy expectancies. 

Notice this has nothing to do with the market you're trading or the setup you're using, this all comes down to your money management rules, to your reward to risk ratio rules. But some of you might be saying well, I don't know how to calculate that. Well, then you need to figure that out. That's one of the things that we teach in our classes is every trade we go into, we have a reward to risk ratio, we have a target and we have an exit point and that helps us create a reward to risk ratio and then based off of that, that gives us the green light to take the trade or the red light to hold off. I'm telling you, this is the most important law you're ever going to come across. Are you listening? Where are you at in this? What I find is people will listen to this and then they go Yeah, I get that and then they'll see a trade and they're like well, I just, I know it's going up, it's not three one, but I don't care, I know it's going up. I'm just getting in. That's a lack of discipline. leads to bad trading. So stay tuned every Tuesday, like today and next Tuesday, when I'll continue to teach you different ways to take your performance to elite level. Have an awesome week. I'll see you next Tuesday.