The Single Biggest Secret to Profitable Trading (Surprising)

you've been taught entry techniques that promise to take you to profitability you've been given countless indicators and chart patterns you've learned strategy after strategy but none of these things will help you become a consistently profitable trader if you don't know the single biggest secret to profitable trading in fact you'll likely continue to struggle until you start doing this one thing correctly hi i'm mike belafieri co-founder of smb capital a proprietary trading firm located in new york city founded in 2005 sme capital trade stocks and options and futures in crypto both as discretionary and automated traders in this video lance breitstein the number one trader at a tier one prop firm in back to back years will reveal the trading secret that is the true huge edge that elite traders use to crush it in the markets unfortunately it's what the vast majority of retail traders are never taught and in this video we're going to reveal exactly what it is and how you should apply it for maximum benefit [Music] in this video i'm going to be presenting exponential bet sizing i'm lance brightstein and you can follow me on twitter at the one lance b so what separates the elite trader from a novice intermediate or anywhere in between what i've noticed is it's a confluence of traits but if any of them stands out to me the most important thing is betting big when the situation calls for it the best traders that i know all have hugely skewed asymmetric bets and when that trade shows up they knock it out of the park and in doing so they make up for all the errors in between and just wipe the competition away stan druckenmiller one of the most famous investors of all time puts it nicely if you look at all the great investors and they're as different as warren buffett carl icahn and ken langone they tend to make very very concentrated bets they see something they bet it and they bet the ranch the mistake 98 of money managers and individuals make is they feel like they've got to be playing in a bunch of stuff if you really see it put all your eggs in one basket and watch that basket very carefully and look i'm not saying uh you quite want to listen to to stand there by putting all your eggs in one basket as a trader but i think the sentiment is absolutely correct whether it's investor day trader swing trader when the standout odds get absolutely incredible the absolute best traders are betting huge and making that trade count and maximizing the opportunity when i first started my trainer made many mistakes and he had many weaknesses but he was exceptional at one skill in particular and that was bet sizing and what bet sizing did for his trading was incredible it allowed so much skew so even if he over traded or even if he made some mistakes or even if he made uh missed opportunities elsewhere everything was made up for and then some all in one trade and it was amazing to watch and what that did is it allowed him just a massive massive cushion and so often it might be the same layup trade you're making and the same executions um and so while other traders might just make an average trade i can make my month in that and so especially in the layups people would be having a solid trade or a decent trade but if it was really really good and really really liquid i wanted to maximize that and go huge so what i want to do is walk you through what i like to call a little mathematic and the reason for this is many many people can intuitively grasp just how important this is the mathematics are kind of uh kind of kind of wonky when you don't have it right in front of you and a lot of traders don't realize what's going on behind the scene and all human binds are particularly bad at exponential changes we can't comprehend just how quickly things can go totally lollapalooza so we're going to take a couple simple case studies we're going to look through what happens mathematically on equally sized bets what happens mathematically on linearly sized bets and then we're going to finally take exponentially sized bets where a lot of the magic happens so here are the parameters we're going to have our a trades which our are our absolute best ones we're gonna have our b trades c trades and d trades and what i did is i just made up these stats there's nothing special about them but i roughly approximated uh what what some of these good trades will look like so an a trade obviously has a large expected value of about 350 b trade 110 c trade 10 cents and d trade losing 20 cents so what a lot of people miss out on and i think is one of the most important things to recognize is that the a trades by their nature tend to be very very rare yet d trades are everywhere on each day there's so many tickers moving around and there's so many trades you can make but the reality is that edge only occurs in a very small subset of places so if you're going to just be trading tons and tons of setups even a professional trader is washing out in the majority of them most trades are c or d trades where in the aggregate you tend to break even on those if you were to look at the days weeks or months and years of a trader's performance i would guess that probably 90 of their trades do actually wash out and it's the major outliers that make the bulk of their their day so using these stats we're now going to look at 100 sample trades if you want to learn three more real world setups that our traders use including the simple setup that we teach all of our new traders and the setup that turned one of our traders into a seven figure big money earner check out the free webinar that we're currently running just go ahead and click the link that should be appearing now at the top right hand corner of your screen that will open up the free registration page in a new window so don't worry you won't lose this video you can also visit tradingworkshop.com to register for this free intensive workshop you're going to learn more in a couple of hours from this trading workshop than from years of online education so what we find is that by the nature of d trades being so much more common if we bet equally and we're taking all these trades uh you're going to end up with a negative expected value and a negative p l of 1060. now for the linearly sized bets what we were going to do is bet one on on the d trades two dollars on the c three on the b's and four in the a trades so that's just a basic linear pattern um improving slowly over time and so this actually makes a massive difference in itself because now what happens is in our a trade uh it's enough to make up for for all the rest and so that results in us having a net p l of seven dollars and ten cents so that alone took us from being a negative expected value trader and now we're positive and i can't stress enough how big a loan that is right these traders are taking all the same trades these traders are trading them in the exact same matter but one trader won't have a career in two years and the other is going to find some success now what happens if we bet an exponential amount so an exponent function you know if we were to take a d trade uh that would just be one c trade would be two dollars b trade would be four and a trade would be eight dollars and now this has an incredible effect because that a trade which has such a better expected value we're putting so much more money on so when you multiply that eight by the 350 you make a whopping 28 dollars in that trade alone that 28 is made more than makes up for all the d trades and gives you a hefty cushion on top so now you end up as a really strong trader with a net piano of 2440. but i want to take this one step further what if we work on that and skew our betting even more or as i like to call exponential betting gone wild so on the d trade we're still gonna bet our one dollar but then on the c trade we're gonna bet three and then on the b9 and the a27 so also an exponential function but just a little bit more juiced and what you can see is when we're betting so so so big on that a trade which is 27 x the amount of our d trades we make a whopping 94.50 expected value p l on that trade and that might seem crazy but the big elite traders that i know that's not uncommon at all it's totally normal for an elite trader to bet 20x 50x sometimes even 100x on their really choice a or a plus setups compared to the the mediocre washout ones and what happens now is you have a net p l of a hundred and eight dollars so again i can't stress enough these are all the same trades it's all the same thing all we're changing is how we're betting across the quality of trade and it's the difference is just unbelievable and so what are the implications of this there's a couple first of all you might be an unprofitable trader that's struggling but you might be making the right trades in the aggregate the only difference is you aren't betting properly imagine being a poker player and betting the same on every single hand you would never stand a chance why is that because in poker most of the hands you get are not going to win you the hand right it's the same as trading if you were to play every single one and bet one dollar every single hand you're going to be out of chips in no time the other thing to keep in mind is adding size made up for a lot of mistakes right we heavily weighted the number of of mediocre d trades uh to be 96 out of the 100 and yes that's kind of uh an exaggeration there may be versus reality a lot of people might not make those but the point is is that when you start to skew the really high expected value trades you can make up for all the paper cuts you take especially in a slower market what we find is that a lot of traders will still take paper cuts but when the home run comes they bet on it and make it happen so then finally expand exponential sizing is what can really take you from from good to great and then to elite everybody i know that has broken into the the realms of being an eight-figure trader they don't do that through hitting singles every day singles and day trading worlds can only get you so far due to liquidity and number of ops in order to really hit the big leagues you need to make those big bets count the bigger traders have worked up from from linear betting to an exponential then a greatly exponential indeed and to be clear we're not necessarily taking a super scientific approach to this and calculating the right dollar amount for every single trade this is just for example sake and the type of curve and bet sizing curve i want you guys to be thinking about and emulating over time so now the practical advice on how you can implement this into your own trading so first you want to add skew gradually and prudently you don't need to go nuts all at once like i said if you're someone that's betting equally first try betting linearly increase your bet as the opportunities get better and better if you're someone that already does vary their bed size see if you can make it more skewed perhaps you can bet less on the d trades and the c trades and perhaps you can push some of those a trades more but the key is to be mindful of too much size skewing the ev of the trade some trades just don't have the liquidity and if also if you do this too responsibly it might skew how you trade the trade itself what i would also recommend is focus first on sizing up the easy high probability layups you want to be very careful of sizing up on the high variance home runs until you kind of have the cushion and the experience to weather through some of that really really focus on those layups because those are going to be what gives you the the confidence and cushion to keep on pushing one thing also to add is if you're a beginner trader this is this might not be the topic for you right now a lot of beginner traders need to solely focus on getting reps and building their system first you want to do so safely while losing the minimum amount of money possible but once you know that you're executing properly and that your system has edge then it might be time to slowly add skew to your trading and the extreme levels of sku i used in some of those examples those really are for the elite level traders they're okay with the variance they're okay if a big trade goes wrong because they've been in holes before they know what drawdowns are like and they have the psychology and the mindset to get through those things and overall what i would say is this also isn't for everyone bet sizing still needs to align with your personality and your risk tolerance some people are okay with the home runs some people have life situations or personality situations where it's going to be more just hitting the singles so one thing i do want to address is this many people would argue that it's fine and normal to bet equally on each trade in fact a lot of people have been taught that you should be betting equally on each trade but i can't stress this enough it is dead wrong whoever is teaching you that is wrong objectively and mathematically wrong yes i understand why it might be more comfortable to bet the same amount but imagine if people did that in poker poker is a much clearer analogy where there's a finite set of outcomes and you can calculate the odds if somebody ever bet equally on their poker hands they would never ever ever make it anywhere all because again most trades in most hands don't have edge and when you do have significant edge you need to skew it to make up for that and i would argue that if you're betting equal amounts it means one of two things you either aren't taking the time to study and differentiate between your different hands and you can't properly identify which one of your trades have skewed edge versus others or it means you're choosing to make mathematically sub-optimal bets again there's nothing necessarily wrong with that people's personalities are different there are many people that do to their home life or their their income or whatever else they can't afford or don't wish to be volatile in their trading it's totally fine but you need to acknowledge and accept that you're limiting your returns and also not doing the suboptimal betting there is no way anyone will ever do as well betting equally or even linearly versus the person that is betting exponentially as their hands get better one other thing to touch on is i know what my pocket pairs look like and that has afforded me the ability to bet huge on them and that's given me a career that's far surpassed many others around me but i would even push as far as saying that it's your job and your responsibility to bet big even bella would say it when things are in your favor it's your job to bet big in fact we would even argue that it's too risky not to go big you can't afford to not go big on your best hands why because that means otherwise you're allocating more risk elsewhere in subpar hands it is your job to do this to yourself if you're trying to become the best trader you can be coming soon i also want to present to you the sizing note card this will be a practical video tip for how you can add size to your trading until then feel free to reach out with any questions as i always say right after we get through the questions then let's get the f to work thank you all for listening hey go ahead and click our subscribe button so you don't miss any of the videos they're producing for you and the trading community and please take the time to add your feedback in the comments section for what videos you'd like for us to produce next and what you found helpful from this video from all of us at smb train and trade well

Channel: SMB Capital

Views: 96,395

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, lance brightstein, lance smb capital, lance smb, trading coach lance, lance trading, lance b trading

Id: D5hlyKd2O0I

Length: 15min 37sec (937 seconds)

Published: Sun Aug 14 2022