Back when I was at university, I had a friend who was really into horse racing.
We used to call him Grandad Josh, because it was sort of like he was
this 21 year old going on 65 years old.
Now, some days when I was procrastinating from my uni work, or skipping
a lecture here and there, I'd actually join him and go down to the bookies.
And he'd stand there along with all the other grandads, three or four
times his age, just watching the TVs and betting on the various horse
races that were going on that day.
And I'd see Grandad Josh watch the TV, then jot something down in his
notepad, do a few calculations.
Then he'd write out his betting slip,
that it to the cashier and places his bet.
Now, most of the time he was betting on an outside bet,
complete underdog, and only very occasionally would
he actually bet on the favourite.
And it was never just based on the funniest sounding horse name
like my bets were.
So I'd ask him what his process was
You know, if the favourites were most likely to win, why wasn't
he just betting on the favourites?
And that's when he told me something that was shockingly obvious and surprisingly
simple, and it stuck in my head to this day.
It's actually impacted the way that I approach my trading.
You see, he wasn't looking for which horse was most likely to win.
He wasn't even betting on which horse he thought was going to win.
I know it sounds a little bit counter intuitive.
What he was doing instead was looking for the horse that presented the best value.
In other words, if that same race was run a hundred times over.
Which horse would generate the best return for him.
It might be that a horse has odds of hundreds of one, but if Grandad Josh
thought that that horse might win even just five times out of a hundred
races, it's likely to be a much more profitable bet than backing the favourite.
Even if the favourite is more likely to win than the outside horse.
So he wasn't focused on that individual race.
It didn't mask him the results of that race.
He was focused on his own performance over time.
So it's the accumulation of all the races that mattered to him.
So what does this have to do with our trading?
Think about when you perform your technical analysis, what
is it that you're trying to do?
For most traders, they're going to be trying to predict
what's going to happen next.
In fact, many traders post their analysis online with all of these
arrows showing, where do you think the price is going to move to next?
So this means they're looking at different potential outcomes for
the price and choosing the one that they think is most likely to happen.
In other words, they're backing what they think is the favourite each time,
the one that's most likely to happen. But instead, if they want to maximise their
success over the longterm throughout their trading career, they should be approaching
things a little bit differently.
So rather than trading the most likely outcome, they should be trading
the one that has the highest positive expectancy.
The one where if you encountered a similar situation, a hundred times over, would
be the one generating the most profit for them.
So for my trading, I use something that I call a context-based approach.
I spoke about it in loads of detail, in a video right at the start of the
year, which we'll find linked up here
if you want to watch it. It's definitely worth watching
if you want to start using a more profitable approach to trading.
So what I'm basically doing is assessing all the different outcomes that could
happen from where the price is right now.
Where might the price move next?
And what would those different price movements mean for
the context of the market?
Now for each of these potential outcomes, I'm considering what I refer
to as the quality of the trade. I like to keep this quite simple and just
look at three broad aspects of the trade.
I have the risk, the reward and the estimated probability.
Now these three combined will show me the overall quality of the.
So, if we think back to the example of horse racing, we had the risk and reward,
which were the odds on that horse.
For example, if a horse had odds of 30 to one, the risk
is one, the one that you bet.
So if it loses, you will lose that one.
And the reward is 30.
If the horse wins.
Now the missing piece there, is what you consider the probability of that horse
winning to be, which makes the overall situation therefore profitable or not.
Does it have a positive expectancy or not?
In some cases, the probability of it winning might be very, very low,
meaning it's much more likely that if you put a bet on, or if you open a
trade, then it's more likely to be a loss than a profit, but the risk and
return involved in that situation might still make it a high quality trade overall.
For example, if the chance of success is just 20%, but the
risk is one and the reward is 10.
It means if I open that trade, I'm much more likely to take
a loss than to make a profit.
But if I open that same trade again and again, over time, I'll
make a profit overall because it has a positive expectancy.
So this understanding means that when I assess a situation, I don't just
look for the most probable outcome and think about whether that most
probable outcome has a risk reward that makes it a viable trade for me.
I also look at the other potential outcomes and think about whether the
risk reward of those make them viable trades as well, and maybe even better
trades than the most probable outcome.
So not only does this lead to me opening better trades,
but it also increases the number of possible trades I can open because
there are fewer restrictions.
I don't have to always trade the situation I think
is most likely to happen.
Now this sometimes leads to you taking trades that go entirely against the grain,
where you know that you're likely to lose that trade, but it's by focusing on the
long-term accumulation of your results,
so your long-term performance rather than each individual trade,
that you become a great trader.
In fact, sometimes the most probable outcomes in a situation have a
long-term negative expectancy.
And I think that that's often what destroys many traders
without them ever realising why.
So the best tekkers for great trading is to not always back the favourite,
but to consider all potential outcomes and look for the ones with
positive expectancy, and if you do that
you'll be making Grandad Josh very very proud.
So look, there are two things you desperately need.
If you want to make this work for you. The first is that
you need a consistent system.
Otherwise you won't see the long-term benefits of this approach.
You'll just end up keeping on taking short term losses.
And the second thing is that you're going to need a context based approach.
So to understand that I'd recommend you checking out our video on
trading a context based approach.
It will appear on screen at the end of this video.
And there's also a link to our free training.
If you want to learn more about the way that I trade the markets and the
way that I look at things, please do hit that thumbs up button to support
the channel, and maybe even leave a comment below letting me know whether
this is something that you're already using with your trading, or whether it's
something that you'll consider using more in future.
Just in case Grandad Josh comes along and sees this video,
I'd like him to see some feedback there and I'll see you in the next video.
Thanks a lot for watching.
Take care.