Everyone - I must admit my typo. As one viewer noticed, I typo’ed in my Excel EV calculations and didn’t make risk negative. So the sample math I used is incorrect, but concept remains the same! Apologies 🙏
Hey Lance, wouldn't it be better to wait for a 3rd or 4th leg to buy for long and go heavier here instead of getting paper cuts on the 1st and 2nd legs? Granted you see a lot of volume on 3rd and 4th legs
@@ohmytrex7554only w benefit of hindsight. Bc you don’t know which ones will do that. You are trading 1st and 2nd leg bc you assume pos ev. Most won’t make it to 4 or 5 legs.
Lance puts out the best day trading educational videos on youtube bar none. What an absolute wealth of information packed into each one. And from an 8 figure yearly trader. Wow. Just wow.
After watching years of SMB videos you guys are really increasing the value of these tutorials to this community with very real actionable insightful lessons. The content is improving dramatically no longer repeating noted playbook themes and without dragging out to long. I want to say Thank you and please keep them coming. Trading seems full of contradictions and while initially i thought 'Don't add to losers' Lance is really helping open my eyes to probabilities over right and wrong. One Q. Don't you need to subtract your losses from A & B from your 80% reward in reality?
Here is a confusing answer: If you want to think of it that way, yes, but then you’re also forgetting to add them back in :) Meaning… there will be times A and B are losses but also times they are wins. If we assume they are pos EV and that is why we are taking the trade, then overall they are adding pnl to the ledger in the long run. That make sense?
As someone that is moving into the "professional trader" category I really appreciate sharing these concepts. The concept of greater expected value and size really gave me a light bulb moment!
@@tradewalker8187 Agree. It's always more difficult than the video. What you need is a playbook for a bottoming pattern and then use an entry signal to get into the trade. What this video does a great job of explaining is the change in expected value. There are many ways to assess a bottoming pattern and like anything nothing is 100% as there can be lots of variables. Bottoming patterns are my number one high hit rate pattern..
this is something that i discovered by myself and worked marvelously until the day of reckoning came when there was no mean reversion. But I really like how you say that there can't be fresh news, you SELL at your stops, wait for the next leg AND you increase size. I like it. another tool in the arsenal. thanks lance!
Hey!!!! I saw this video this weekend and just saw it in /es and as bella said i swung for the fences and loaded up making my first big one good trade!!
Loosing repeatedly even after following sound technical analysis can cause one to stop trading. This can be counterproductive as the market may be offering ( after you have stopped trading) very good opportunities for a profitable trade. This is a huge psychologically based error in trading. Thank you so much for creating an awareness of this error. The often talked about rule that one should stop trading after two or three losses definitely needs revision.
this is by far the most important video on trading i have seen online. completely changed my PnL. a masterclass on position sizing in relationship to perceived edge. the opposite of what many teach of keeping position size the same for each trade. thank you for this analysis Lance.
Its so hard to bring technicals and psychology together but you guys do it brilliantly in this video thank you as always my trading has only gotten better from this channel, thank you for all that you do.
Huge point! Thanks a lot! Ways to calculate trade odds? Watched your 201 and your logic for lack of ground for backtesting. How would you lower the deviation on odds calculations given the variability of markets and entry setups. My 50cents... 5:22 every leg gets more probability of bouncing back. The longer the move, the bigger that 50% base case retracement of the move as the pendulum moves further from balance. 8:48 run the math on all your trades for the DRC. Change the probability of each trade working...that's where I'd lack experience. 12:25 Use flush velocity to increase your odds and size. 15:07 twitter humanity
Like the probability analysis. Would combine this with a hedging management system. Hedge your small losses on the way down. Once the odds are in your favor slowly solve the hedges or cautiously average in. This combined with trading both sides of the market just following the prevailing market structure until it shifts is super powerful.
Great video as usual. I used to do this expected value exercise on my playbook trades but haven't done it in a while. I'm going to start doing it again.
SMB- I have been part of the tech layoffs recently and found your channel after. I have been investing for quite a while now but these videos have given me the ability and confidence to trade. My P/L is better than ever and I enjoy it! Keep up the good work guys, thank you! Lance- what’s your best P/L? I am going to beat you
Thanks Lance, this video is an extremely valuable insight. Thanks so much to you and SMB for posting this. Sometimes I try to call the bottom, then jump in. Many times the bottom has not arrived yet and I get stopped out taking the loss. When in reality, I should hold and wait for the direction to return. What you offered that is very helpful is noting the speed and velocity of the moves. I just watch for multiple negative moves, but now I will watch the speed and velocity. Thanks again. I find myself watching more and more existing SMB videos as well as always looking forward to any new releases. It is truly outstanding and a class act that both you and SMB are willing to share such great insights and knowledge.
Lance, correct me if im wrong here but it seems to me that with a daily loss limit, and considering the asymmetric frequency of legs (most stocks only have 1-2 legs), it would not be practical to go for the mathematically optimal (EV optimised) strategy esp for a small account for example: if 90% of stocks only have 1-2 legs, and my daily max loss is $10 , in order for me to fully optimize for EV, i would need to size in really small ($1 and $2 risk) on those 1st and 2nd legs in order to continue trading 3rd and subsequent legs (with $4 risk) without hitting my daily max loss, however if those super high EV subsequent legs do not happen frequently enough then won't i be better off just re-allocating risk to those 1-2nd legs instead and ignore those with >2 legs due to limitations of daily max loss?
Great point! It is really hard to say and dependent on how one tracks and defines these opps and what that data says. But yes, you’re right. You’d want to listen to the data and adjust the bet sizing appropriately based on that.
@@TheOneLanceB Thank you for your reply! I've just started to get consistently net profitable after 3years thanks to your videos, looking forward to more!
Lance!. When the market is falling you buy only when you no longer what to buy, because you are afraid that the market will keep going down, that change of expectations signifies the bottom.
I was waiting for this video for this video from lance..so he can own you martingale casino gurus that have no EV on blackjack. Come trade and play a system that has positive EV and the martingale over here. You will simply change your life. I love losing 2-3times in a row because then I’m sized in so heavy on the 4th trade I make back all the -3R and end up 6R. Only top guys will understand this comment. Keep ‘em coming lance on the expected value videos and hopefully we can get through to these knuckleheads. 🤯👊
Love love love SMB and really appreciate Lance. I like that these videos are not long and drawn out either and they stick to one learning opportunity. Just wanted to say yeah that’s me on the A trade. It’s 1000 shares on the B trade it’s 500 shares on the C trade it’s “fine I’ll do 100 shares” and there’s no realistic way for me to make up the previous losses from the first two trades w 100 shares. Looking forward to waiting until the C trade and sizing up and getting better and becoming a consistently profitable. Trader thanks to SMB capital.
Excellent as always, thanks. I just faced this yesterday. It's always my own mistake not seeing the pattern or being scared off by those repeated downswings.
Can you explain why you would go for the buy instead of the sell on a downtrending market? Im I wrong to assume the first pullback (point A) on a downtrend has the highest probability to keep going down? Or am I missing something?
Depends the chart and situation. If it’s already oversold and that’s why I’m buying, then you don’t wana be shorting something oversold and overextended.
Hi Lance, I watched the video thinking of swing trades but is it convinient for Day Trades? What is the best time frame? Thank you for sharing all your knowledge and experience!!😊
Thanks for talking about this most common issue with mean reversion and proper approach to trade it. I’ve done the mistake too and am slowly trading this better. Question: How does a retail trader come up with the probability to calculate EV ? Is it just by experience ? Do you have any videos talking about this ?
All your guys videos rock, but this might be the most insightful out of all of them. I have been TERRIBLE at mean reversion and I can't wait to try this tactic.
Lance, thanks so much for the video, it was extremely insightful. QQ - do you recommend a ratio increase you go from point a to point b and to point c? meaning is point a, I put in $100, what would you recommend for the position to be for point b? is it $200 (double)? and what about point c, is that $300? or triple the original investment? I ask because I think it might be advisable to consider that contingency that point a will fail and as such you should expect to have to buy in again at point b and then again at point c. This would all be part of the 'plan' before you enter in the trade. So any advise on what the incremental lot sizes should be as you go down the retracement? Thanks
Depends the individual preference and the quality of the trade and other factors. What I would say is prob best to be conservative early on and leave room to get more aggressive later. Need to always get within your daily risk limits. But yes, having some type of gameplan as to how much to bet beforehand is really smart.
very helpful, thanks. Recognizing those levels down where EV isn't increasing (e.g. long consolidation, slow moving) is I imagine a function of experience.
Hi Lance, I've been following you, Bella and SMB Capital for over a month now. I found your videos very helpful and incorporated them into my strategies quite well. I also have my easy playbook started and I'm constantly making profits. Thank you guys for putting these videos out. One of my easy playbook strategies was this exact one you explain in this video. I've been making money with this strategy, but I lost big today because the lower leg kept going lower. Can you please talk about the scenario of how to trade when the legs don't recover throughout the day? Some days I've waited through the day for the leg to recover and it has worked but not today. I was trading TSLA, which came down recently from highs of 299. Hence, I wasn't expecting a nose dive as it did today. As usual I took a few losses and thought the probability had gone higher so I entered with size but it pulled on very hard and got caught off guard with a much larger size bag holding into close.
I would not recommend using a stop loss in every single position as it is shown in an example. It will get shaken 50% of the time and your cumulative loss will be higher if you instead would use some bigger stop loss far from the price like ''daily stop loss'' for example. And yes this concept is right - every losing trade increases the probability that the next trade will be profitable, so adding volume after losing trade does make sense. But you have to do it in the correct progression. Backtest your strategy together with this concept over a long period of time with algotrading software to find correct settings for your trading strategy and ''volume build-up progression''.
Also consider that all losses are not created equally. If you chase a stock with late entries on a trend your actually no closer to a winner if that’s your strategy day in day out. If you buy pullbacks on the other hand and get shook out maybe but buying extended and selling the reversion is a rookies game leading to painful lessons
15:00 the anti-martingale: bet higher when the probability and expected value are increasing in your favor, improved personal performance can also be a contributor.
This concept is very similar to card counting in BJ. Ev is + 2 so you make a bet. Dealer gets dealt BJ and you get 2 tens making 20 and lose. Now the count is +6 due to 4 high cards removed from the deck so you bet even bigger. Same thing happens next hand and now the count is + 10 which is extremely high and rare to have so you wanna much much bigger.
Reminds me of the "dollar cost average" strategy where one has a target range for the turn around but not an exact point. Buy entries lower than 1st, lower than 2nd, then 3rd buy entry will average down the higher 2 closer to the actual turn around.
Thank you Lance! If my capital allocated to a 3 attempt trade as you described was divided into 8 or 9 equal parts, how much would you allocate the given trades? Would it be something like 1, 2 and 5? 1, 3 and 5? Thanks!
@TheOneLanceB - Completely understand the concept as used to play poker. However, my question is, how do you determine the probability of each event? It is possible in poker because the variables (cards, odds, etc) are fixed (other than the human reaction), but in trading these variables are not fixed as well as not ever being able to know all the variables. Saying point A has a 40/60 chance or whatever is basically a complete guess. How do you get to the 40/60 or 60/40 or 80/20 for each event? Because these probabilities are the key impact of the overall expected value. I'm assuming the only way is to get a historical sample of these trades and use that sample to give an imperfect idea of odds.
What’s a real world EV requirement (in terms of R) for you to add it to your playbook? Most of mine end up in the .25R-.65R over the long term and not sure if that’s enough of an edge.
Important comment Lance made - each leg lower should be bigger with momentum. If the legs are smaller without momentum, aren't you looking more at a fade which is not going to bounce this way?
What software do you guys use for Level 2, Time, and Sales? Using think or swim but it does not display that data as easily viewable as what I see in your videos.
Hi Lance, awesome video really enjoyed every second of it. I've been trading this setup since the last video and was Burned twice, now I get the missing peice about the news factor/value factor, I was doing it on latest earnings announcement capitulation moves ,which were very complex and usually did a sideways consolidations and breakdown. I just have one doubt, if a stock had a capitulation move downward and there's no news yet, but after our 1 st SL if we get the news and its not negative per say, should we attempt another entry on leg lower or will it be wise to sit though and watch the action? PS: should we also give some weight to nearby important support or resistance by loading up there, if price suggests?
Great clip Lance and completely agree. Statistically and in terms of financial mathematics, the martingale is another form of random walk so constant expected value while as you note, the lower a price gets the higher the expected future return is and the unknown is time.... Great for intraday trading with the right underlyings ( and news too as this happened last with with a few stocks after earnings that bounced ) and the best example is a recession. Stocks drop more than 30 percent and eventually buyers come back in due to a higher expected future return......Thanks and great clip.
Im not trying to get caught up in a small detail, But I thought E.V.= (reward x prob of gain) - (risk x prob loss). For example A (min marker 8:35'ish), I get: EV = (.5 X .4) - (.2 x .6)= .08; not $0.32. What am I missing from my calc? Still a positive EV, but I just want to make sure I am looking at EV correctly.
Lance, as a trend adds its waves, you get closer to exhaustion. Betting short or long on the first wave can lead you to quick money losses usually from the emotions of seeng an implulsive move towards the zones that have no immediate support or resistance. One pullback often coinices with cycle verification, and if the velocity and mass are great enough you get momentum on your side. I woiuld not merely let the third wave go by after the pullback or second wave. Wave three, that is where it is important to go big. After wave five unless you know your intrument well and its context , this is a time to wait out consilidation, zig zags, or a reversal which is a shorter impulsive move in the oposite direction. I see more price action movemnent familiarity than psychology here.
I've noticed in a few of the videos, that include info about "EV" equation, you just throw in a random number for "probability." How do you know what the actual "probability" number is for the equation of "EV"?
To be honest I want to be on the short side until I am long. If I get stopped out I may flip the trade. I find holding it short until you are long gives you great entries. You leverage greed until you find exhaustion in that direction. Patience is key.
Complete Rookie question...please If I sell a PUT at 15 and Buy a Put at 14, what happens if the price is at 14.45 at expiration? Thank you in advance.
I'm teaching myself for about 15 months. Found a strategy making 4.2% profits in six minutes in one trade most mornings however only in positive news. When economic events come up I lose profits. Is it a case of keeping a very close eye on the economic events and news and staying out during the turbulence? This can go on for a while example bank crashes.
Wouldn't it be better to place your buy after the fourth dip (after C, call it D) when you have a clearer signal of a trend reversal (a higher low than the last low)? You don't really know A, B or C are on the right side of the V, and it turns out A and B aren't.
@TheOneLanceB hi bro . your examples and videos are on stock base. do you have any video links or content or website esp for forex pairs . thanks in advance.
I still revert back to this video. It works phenomenal as long as the upside is substantial. I tend to risk 10 points so if I'm wrong three times I'm down 30 points. However I'm usually looking for 50 to 60 point moves In my favor.
Great video as always. Thank you for the amazing content! A few simple questions if I may: Does this hold true not only for large caps like Apple but also small cap or penny stocks? Where do we put our stop loss with this system?
Yes, but obvi the more stable and boring the co the better. Stop loss depends on the trader’s system. I generally have it at lows of move then as it progresses am using trailing stop of prior bar lows
I've turned most my losses into profits by trading on the next higher time-frame. The higher time-frame I went, the less losses I was having using the same strategy.
I tried shorting fslr front side.. made a tiny bit on the waybut at the top they grabbed my liquidity at hod before dropping it down 7 dollars. This happens VERY often where it pops thru the high only for THAT to be the top. And i have yet to come to a solution, because a good trader always stops out... and shorting near the bottom of that range is suicide.
You should do a video about when the trade is working. How/when do you add more size when everything is going your way? How do you exit? Do you exit all at once or size down little by little until you're done completely?
I’m generally using trailing stop of prior bar lows. But really depends the situation. Sometimes I’ll scalp some out quick and hold core. Lot of ways to skin a cat.
Great video. Aren't most price movements or legs due to news? (Earnings, Cpi reports, new products, etc). How do you know that it's not just an additional leg continuation based on fundamental changes.
Great question. No easy answer. Part of that ends of being feel and experience as to know how soon “fresh news” becomes panic later on. If news came out, but then we are multiple legs later, it starts to get appealing again. But especially w news, might not retrace as well and so important to be tight w size and risk.
Thank you for the insights. I feel like I have a better understanding of maximizing the strategy and defocusing on the noise. Nother good one..always appreciated.
Hey Lance, thanks for the video. This directly relates to a thought I had the other day about stop losses. I'm a newbie and it's pretty clear that I get stopped out a lot. So it had me thinking that if the position is going the wrong way, I should look for a better entry position (lowering my overall breakeven) and double down , or double my position. My thinking was based on the idea that the move "should be" temporary and if they stock just gets back to my original entry point, I would at least come out ahead, if not at break even. the death by a thousand cuts is definitely a real thing. Thanks so much for adding 'the math' to my internal rationaliion.
If pos EV, why would you skip? If to leave more firepower, just bet small. In long run will add to your bottom line. You don’t know which ones will keep going. Many will bounce and you want exposure if pos EV
Yeah it'll work sometimes or you could just get a complete flush. Let's look at the money. You are buying long on the first one. You lose. Let's say you lose $1k. You buy the 2nd one. You lose $500. Now you are upside down $1500..so you have make at least that just to get even. But you can tell easily whether to buy the first turn or not. Is there old support there? Does Time and Sales show a large block of buyers coming in? I use this every day trading futures on a 1 minute chart and it's the best thing I've ever done to make money. The old Time and Sales. There is nothing else that tells you what is happening at the time it is happening. So the futures go down to a pivot or support point and I get green coming in..maybe a block buyer of 300 contracts. Even better is to follow the trend and use it
Lance, thanks so much for this video. It uncannily described the problem I've been having and provided an explanation and better yet, a solution. I'm looking forward to implementing it in my trading and expect to see a marked improvement in my P&L. Thanks again.
This IS what I Have to train More and IT IS what I just lately Have been trying to do after one year of trading. IMO This consept has quite The Same filosophy behind as The one that always risk More on The best A+ Set ups than others. And More on b Set ups than c. Thank you for The video ❤️🙏
Not sure if it's the same but almost every day I see a hot stock drop below VWAP and the rest of the day traders are slowly pushing it back up until it gets to the top or 1st VWAP line (I call it VWAP jail bars) then it goes back down and sometimes it breaks over.
Great Video Lance, thx for the insight. This is something I have been working on in my trading. Question in the formula for probability of being wrong seems like the number is inputted as a positive number +$.20 . Should it not be inputted as a negative number -($.20) ? If so it changes the EV. Curious to hear your thoughts as I am working this into all my setups to see where edge is best with RR. Thx for your time, Cheers
I did the martingale strategy at the casino before I knew it was illegal at the casino. It doesn't work on 1/1 odds tables and it isn't guaranteed to work anyway because they have table limits. There is no law or limits in the stock market so if you have the capital, it will work.
Seems to me this comes down to understanding the best opportunity based on context, not historical win/loss rate. The opportunity exists regardless of how you feel based on current position ( $ and psychological). In essence you talked yourself out of the better probability trade because you were deflated. The math doesn’t lie but you think it is if you don’t understand and/or accept it.
I prefer the Martingale System with a large bankroll when playing blackjack at either Aria Resort and Casino or Treasure Island. Those 2 casinos have the lowest house edge in Vegas.
It happens all the time. Stocks move a ton w no news. Some stocks get run up on euphoria. Others have large people that need to sell for unrelated reasons. Others have stops that get triggered due to technical patterns. Zillion reasons
Would like to see your video where you show the 50% retracement after bounce increases for each wave down, since your premise is based on that stat. Tx!
Take anything that trades and cut the leg in half and that’s where the power shift generally takes place. Under 50% is discount and over is a premium $ so as Lance explains so well, one side runs out as the other side steps in well rested and ever more interested.
You can compile charts based on the criteria you’d be looking for and crunch the data to see for yourself. Key variables being some of what I mention - velocity of move, volume capitulation, etc.
It’s interesting how emotional people get trading. I get it but don’t get it. Set a SL and TP for your set up. It’s sound like some people don’t know their set up well enough but trade anyways. You should probably have a good idea what’s the likely outcome and except it. To me it’s easier than poker, I don’t need to get in the mind of anyone and adjust according. There’s no one there to stop you in trading.
Everyone - I must admit my typo. As one viewer noticed, I typo’ed in my Excel EV calculations and didn’t make risk negative. So the sample math I used is incorrect, but concept remains the same! Apologies 🙏
Dear Me,
It’s ok. I still love you and forgive you.
-Me
Hey Lance, wouldn't it be better to wait for a 3rd or 4th leg to buy for long and go heavier here instead of getting paper cuts on the 1st and 2nd legs? Granted you see a lot of volume on 3rd and 4th legs
@@ohmytrex7554only w benefit of hindsight. Bc you don’t know which ones will do that. You are trading 1st and 2nd leg bc you assume pos ev. Most won’t make it to 4 or 5 legs.
And you were mocking people for not knowing
@@NM-ex4jkoh how the mighty have fallen!
Lance puts out the best day trading educational videos on youtube bar none. What an absolute wealth of information packed into each one. And from an 8 figure yearly trader. Wow. Just wow.
After watching years of SMB videos you guys are really increasing the value of these tutorials to this community with very real actionable insightful lessons. The content is improving dramatically no longer repeating noted playbook themes and without dragging out to long. I want to say Thank you and please keep them coming. Trading seems full of contradictions and while initially i thought 'Don't add to losers' Lance is really helping open my eyes to probabilities over right and wrong. One Q. Don't you need to subtract your losses from A & B from your 80% reward in reality?
Here is a confusing answer: If you want to think of it that way, yes, but then you’re also forgetting to add them back in :)
Meaning… there will be times A and B are losses but also times they are wins. If we assume they are pos EV and that is why we are taking the trade, then overall they are adding pnl to the ledger in the long run.
That make sense?
💯
As someone that is moving into the "professional trader" category I really appreciate sharing these concepts. The concept of greater expected value and size really gave me a light bulb moment!
this video is much much harder in real life as EV is constantly changing, atleast in my experience.
@@tradewalker8187 Agree. It's always more difficult than the video. What you need is a playbook for a bottoming pattern and then use an entry signal to get into the trade. What this video does a great job of explaining is the change in expected value. There are many ways to assess a bottoming pattern and like anything nothing is 100% as there can be lots of variables. Bottoming patterns are my number one high hit rate pattern..
this is something that i discovered by myself and worked marvelously until the day of reckoning came when there was no mean reversion. But I really like how you say that there can't be fresh news, you SELL at your stops, wait for the next leg AND you increase size. I like it. another tool in the arsenal. thanks lance!
Hey!!!! I saw this video this weekend and just saw it in /es and as bella said i swung for the fences and loaded up making my first big one good trade!!
Loosing repeatedly even after following sound technical analysis can cause one to stop trading. This can be counterproductive as the market may be offering ( after you have stopped trading) very good opportunities for a profitable trade. This is a huge psychologically based error in trading. Thank you so much for creating an awareness of this error. The often talked about rule that one should stop trading after two or three losses definitely needs revision.
this is by far the most important video on trading i have seen online. completely changed my PnL. a masterclass on position sizing in relationship to perceived edge. the opposite of what many teach of keeping position size the same for each trade. thank you for this analysis Lance.
Its so hard to bring technicals and psychology together but you guys do it brilliantly in this video thank you as always my trading has only gotten better from this channel, thank you for all that you do.
Huge point! Thanks a lot! Ways to calculate trade odds? Watched your 201 and your logic for lack of ground for backtesting.
How would you lower the deviation on odds calculations given the variability of markets and entry setups.
My 50cents...
5:22 every leg gets more probability of bouncing back. The longer the move, the bigger that 50% base case retracement of the move as the pendulum moves further from balance.
8:48 run the math on all your trades for the DRC. Change the probability of each trade working...that's where I'd lack experience.
12:25 Use flush velocity to increase your odds and size.
15:07 twitter humanity
Like the probability analysis. Would combine this with a hedging management system. Hedge your small losses on the way down. Once the odds are in your favor slowly solve the hedges or cautiously average in. This combined with trading both sides of the market just following the prevailing market structure until it shifts is super powerful.
Great video as usual. I used to do this expected value exercise on my playbook trades but haven't done it in a while. I'm going to start doing it again.
SMB- I have been part of the tech layoffs recently and found your channel after. I have been investing for quite a while now but these videos have given me the ability and confidence to trade. My P/L is better than ever and I enjoy it! Keep up the good work guys, thank you! Lance- what’s your best P/L? I am going to beat you
Thanks Lance, this video is an extremely valuable insight. Thanks so much to you and SMB for posting this. Sometimes I try to call the bottom, then jump in. Many times the bottom has not arrived yet and I get stopped out taking the loss. When in reality, I should hold and wait for the direction to return. What you offered that is very helpful is noting the speed and velocity of the moves. I just watch for multiple negative moves, but now I will watch the speed and velocity. Thanks again. I find myself watching more and more existing SMB videos as well as always looking forward to any new releases. It is truly outstanding and a class act that both you and SMB are willing to share such great insights and knowledge.
This gave me new insights about trading H1-H4 pull backs. Thanks Lance and SMB
Lance,
correct me if im wrong here but it seems to me that with a daily loss limit, and considering the asymmetric frequency of legs (most stocks only have 1-2 legs), it would not be practical to go for the mathematically optimal (EV optimised) strategy esp for a small account
for example:
if 90% of stocks only have 1-2 legs, and my daily max loss is $10 , in order for me to fully optimize for EV, i would need to size in really small ($1 and $2 risk) on those 1st and 2nd legs in order to continue trading 3rd and subsequent legs (with $4 risk) without hitting my daily max loss, however if those super high EV subsequent legs do not happen frequently enough then won't i be better off just re-allocating risk to those 1-2nd legs instead and ignore those with >2 legs due to limitations of daily max loss?
Great point! It is really hard to say and dependent on how one tracks and defines these opps and what that data says. But yes, you’re right. You’d want to listen to the data and adjust the bet sizing appropriately based on that.
@@TheOneLanceB Thank you for your reply! I've just started to get consistently net profitable after 3years thanks to your videos, looking forward to more!
Lance!. When the market is falling you buy only when you no longer what to buy, because you are afraid that the market will keep going down, that change of expectations signifies the bottom.
I was waiting for this video for this video from lance..so he can own you martingale casino gurus that have no EV on blackjack. Come trade and play a system that has positive EV and the martingale over here. You will simply change your life. I love losing 2-3times in a row because then I’m sized in so heavy on the 4th trade I make back all the -3R and end up 6R. Only top guys will understand this comment. Keep ‘em coming lance on the expected value videos and hopefully we can get through to these knuckleheads. 🤯👊
Love love love SMB and really appreciate Lance. I like that these videos are not long and drawn out either and they stick to one learning opportunity. Just wanted to say yeah that’s me on the A trade. It’s 1000 shares on the B trade it’s 500 shares on the C trade it’s “fine I’ll do 100 shares” and there’s no realistic way for me to make up the previous losses from the first two trades w 100 shares. Looking forward to waiting until the C trade and sizing up and getting better and becoming a consistently profitable. Trader thanks to SMB capital.
This guy is a true maestro. No tattoo or blink blink... True wealth man
You have up your YT game this week! Thanks guys!
Great content Lance!
q- what specific news outlets do you recommend in order not to “be in the know” and not take a trade that has adverse news?
Excellent as always, thanks. I just faced this yesterday. It's always my own mistake not seeing the pattern or being scared off by those repeated downswings.
Can you explain why you would go for the buy instead of the sell on a downtrending market? Im I wrong to assume the first pullback (point A) on a downtrend has the highest probability to keep going down? Or am I missing something?
Depends the chart and situation. If it’s already oversold and that’s why I’m buying, then you don’t wana be shorting something oversold and overextended.
Hi Lance, I watched the video thinking of swing trades but is it convinient for Day Trades? What is the best time frame? Thank you for sharing all your knowledge and experience!!😊
Thanks for talking about this most common issue with mean reversion and proper approach to trade it. I’ve done the mistake too and am slowly trading this better.
Question: How does a retail trader come up with the probability to calculate EV ? Is it just by experience ? Do you have any videos talking about this ?
If you could only trade once per day. What strategy would you use?
All your guys videos rock, but this might be the most insightful out of all of them. I have been TERRIBLE at mean reversion and I can't wait to try this tactic.
Lance, thanks so much for the video, it was extremely insightful. QQ - do you recommend a ratio increase you go from point a to point b and to point c? meaning is point a, I put in $100, what would you recommend for the position to be for point b? is it $200 (double)? and what about point c, is that $300? or triple the original investment? I ask because I think it might be advisable to consider that contingency that point a will fail and as such you should expect to have to buy in again at point b and then again at point c. This would all be part of the 'plan' before you enter in the trade. So any advise on what the incremental lot sizes should be as you go down the retracement? Thanks
Depends the individual preference and the quality of the trade and other factors.
What I would say is prob best to be conservative early on and leave room to get more aggressive later.
Need to always get within your daily risk limits.
But yes, having some type of gameplan as to how much to bet beforehand is really smart.
very helpful, thanks. Recognizing those levels down where EV isn't increasing (e.g. long consolidation, slow moving) is I imagine a function of experience.
Hi Lance, I've been following you, Bella and SMB Capital for over a month now. I found your videos very helpful and incorporated them into my strategies quite well. I also have my easy playbook started and I'm constantly making profits. Thank you guys for putting these videos out.
One of my easy playbook strategies was this exact one you explain in this video. I've been making money with this strategy, but I lost big today because the lower leg kept going lower. Can you please talk about the scenario of how to trade when the legs don't recover throughout the day? Some days I've waited through the day for the leg to recover and it has worked but not today.
I was trading TSLA, which came down recently from highs of 299. Hence, I wasn't expecting a nose dive as it did today. As usual I took a few losses and thought the probability had gone higher so I entered with size but it pulled on very hard and got caught off guard with a much larger size bag holding into close.
I would not recommend using a stop loss in every single position as it is shown in an example. It will get shaken 50% of the time and your cumulative loss will be higher if you instead would use some bigger stop loss far from the price like ''daily stop loss'' for example. And yes this concept is right - every losing trade increases the probability that the next trade will be profitable, so adding volume after losing trade does make sense. But you have to do it in the correct progression. Backtest your strategy together with this concept over a long period of time with algotrading software to find correct settings for your trading strategy and ''volume build-up progression''.
Also consider that all losses are not created equally. If you chase a stock with late entries on a trend your actually no closer to a winner if that’s your strategy day in day out.
If you buy pullbacks on the other hand and get shook out maybe but buying extended and selling the reversion is a rookies game leading to painful lessons
15:00 the anti-martingale: bet higher when the probability and expected value are increasing in your favor, improved personal performance can also be a contributor.
This concept is very similar to card counting in BJ. Ev is + 2 so you make a bet. Dealer gets dealt BJ and you get 2 tens making 20 and lose. Now the count is +6 due to 4 high cards removed from the deck so you bet even bigger. Same thing happens next hand and now the count is + 10 which is extremely high and rare to have so you wanna much much bigger.
Appreciate y’all’s content. Emotion and mentally for me has been equally important as strategy
Reminds me of the "dollar cost average" strategy where one has a target range for the turn around but not an exact point. Buy entries lower than 1st, lower than 2nd, then 3rd buy entry will average down the higher 2 closer to the actual turn around.
how u would know the probability?from your stats of the setup you engaged?
Thank you Lance! If my capital allocated to a 3 attempt trade as you described was divided into 8 or 9 equal parts, how much would you allocate the given trades? Would it be something like 1, 2 and 5? 1, 3 and 5? Thanks!
@TheOneLanceB - Completely understand the concept as used to play poker. However, my question is, how do you determine the probability of each event? It is possible in poker because the variables (cards, odds, etc) are fixed (other than the human reaction), but in trading these variables are not fixed as well as not ever being able to know all the variables. Saying point A has a 40/60 chance or whatever is basically a complete guess. How do you get to the 40/60 or 60/40 or 80/20 for each event? Because these probabilities are the key impact of the overall expected value. I'm assuming the only way is to get a historical sample of these trades and use that sample to give an imperfect idea of odds.
This dude does a fantastic job explaining things
What’s a real world EV requirement (in terms of R) for you to add it to your playbook? Most of mine end up in the .25R-.65R over the long term and not sure if that’s enough of an edge.
For me we had 2 nice examples of this, last week on SPY/ES during waves down that bounced after legs down. Great update. Well timed.
Yesterday was definitely a good example of this on ES and NQ
I'm a newbie and this may sound silly but is this anything like the Fibonacci execution? Thank you Great Session
For those of us who actually listen and are wise enough to get this, it is absolute GOLD. Thanks so much!
Ty for listening!
Important comment Lance made - each leg lower should be bigger with momentum. If the legs are smaller without momentum, aren't you looking more at a fade which is not going to bounce this way?
What software do you guys use for Level 2, Time, and Sales? Using think or swim but it does not display that data as easily viewable as what I see in your videos.
Hi Lance, awesome video really enjoyed every second of it.
I've been trading this setup since the last video and was Burned twice, now I get the missing peice about the news factor/value factor, I was doing it on latest earnings announcement capitulation moves ,which were very complex and usually did a sideways consolidations and breakdown.
I just have one doubt, if a stock had a capitulation move downward and there's no news yet, but after our 1 st SL if we get the news and its not negative per say, should we attempt another entry on leg lower or will it be wise to sit though and watch the action?
PS: should we also give some weight to nearby important support or resistance by loading up there, if price suggests?
How do you calculate the expected value ?
Hi Lance, in calculating EV I get 0.08 in Point A, 0.52 in Point B, 1.16 in Point C. Am I doing something wrong?
Thanks for the great content
Me Too
Great clip Lance and completely agree. Statistically and in terms of financial mathematics, the martingale is another form of random walk so constant expected value while as you note, the lower a price gets the higher the expected future return is and the unknown is time.... Great for intraday trading with the right underlyings ( and news too as this happened last with with a few stocks after earnings that bounced ) and the best example is a recession. Stocks drop more than 30 percent and eventually buyers come back in due to a higher expected future return......Thanks and great clip.
Im not trying to get caught up in a small detail, But I thought E.V.= (reward x prob of gain) - (risk x prob loss). For example A (min marker 8:35'ish), I get: EV = (.5 X .4) - (.2 x .6)= .08; not $0.32. What am I missing from my calc? Still a positive EV, but I just want to make sure I am looking at EV correctly.
Lance, as a trend adds its waves, you get closer to exhaustion. Betting short or long on the first wave can lead you to quick money losses usually from the emotions of seeng an implulsive move towards the zones that have no immediate support or resistance. One pullback often coinices with cycle verification, and if the velocity and mass are great enough you get momentum on your side. I woiuld not merely let the third wave go by after the pullback or second wave. Wave three, that is where it is important to go big. After wave five unless you know your intrument well and its context , this is a time to wait out consilidation, zig zags, or a reversal which is a shorter impulsive move in the oposite direction. I see more price action movemnent familiarity than psychology here.
I've noticed in a few of the videos, that include info about "EV" equation, you just throw in a random number for "probability." How do you know what the actual "probability" number is for the equation of "EV"?
To be honest I want to be on the short side until I am long. If I get stopped out I may flip the trade. I find holding it short until you are long gives you great entries. You leverage greed until you find exhaustion in that direction. Patience is key.
Complete Rookie question...please
If I sell a PUT at 15 and Buy a Put at 14, what happens if the price is at 14.45 at expiration? Thank you in advance.
Such a great video and timely too as I perfect my own scaling strategy! Thanks Lance, always love to hear your thoughts on things!
I'm teaching myself for about 15 months. Found a strategy making 4.2% profits in six minutes in one trade most mornings however only in positive news. When economic events come up I lose profits. Is it a case of keeping a very close eye on the economic events and news and staying out during the turbulence? This can go on for a while example bank crashes.
How were these probabilities arrived at?
4:42 great insight
Wouldn't it be better to place your buy after the fourth dip (after C, call it D) when you have a clearer signal of a trend reversal (a higher low than the last low)? You don't really know A, B or C are on the right side of the V, and it turns out A and B aren't.
@TheOneLanceB hi bro . your examples and videos are on stock base. do you have any video links or content or website esp for forex pairs . thanks in advance.
He is a Master in trading and teaching crazy, bless you
I still revert back to this video. It works phenomenal as long as the upside is substantial. I tend to risk 10 points so if I'm wrong three times I'm down 30 points. However I'm usually looking for 50 to 60 point moves In my favor.
Hi Anyone, What is the formula for calculating EV?
Great video as always. Thank you for the amazing content!
A few simple questions if I may:
Does this hold true not only for large caps like Apple but also small cap or penny stocks?
Where do we put our stop loss with this system?
Yes, but obvi the more stable and boring the co the better.
Stop loss depends on the trader’s system. I generally have it at lows of move then as it progresses am using trailing stop of prior bar lows
@@TheOneLanceB Thank you for the quick and clear answer. Very much appreciated.
I've turned most my losses into profits by trading on the next higher time-frame. The higher time-frame I went, the less losses I was having using the same strategy.
Position sizing /dollar cost averaging works if you understand key levels and don't get too aggressive too soon with your sizing.
I tried shorting fslr front side.. made a tiny bit on the waybut at the top they grabbed my liquidity at hod before dropping it down 7 dollars.
This happens VERY often where it pops thru the high only for THAT to be the top.
And i have yet to come to a solution, because a good trader always stops out... and shorting near the bottom of that range is suicide.
You should do a video about when the trade is working. How/when do you add more size when everything is going your way? How do you exit? Do you exit all at once or size down little by little until you're done completely?
I’m generally using trailing stop of prior bar lows. But really depends the situation. Sometimes I’ll scalp some out quick and hold core. Lot of ways to skin a cat.
Hey Lance, thanks a ton! Since news complicate this setup, the assumption is that this setup is better used in shorter timeframes, correct?
Works fine on any timeframe. But news just can be a bit tricker at any timeframe (shorter and longer)
Define leg.
What time frame ?
Why not just trade the third leg ?
Thanks Lance! I know this will really help me in my trading! Another excellent video!
Great video. Aren't most price movements or legs due to news? (Earnings, Cpi reports, new products, etc). How do you know that it's not just an additional leg continuation based on fundamental changes.
Great question. No easy answer. Part of that ends of being feel and experience as to know how soon “fresh news” becomes panic later on. If news came out, but then we are multiple legs later, it starts to get appealing again. But especially w news, might not retrace as well and so important to be tight w size and risk.
Thank you for the insights. I feel like I have a better understanding of maximizing the strategy and defocusing on the noise. Nother good one..always appreciated.
Hey Lance, thanks for the video. This directly relates to a thought I had the other day about stop losses. I'm a newbie and it's pretty clear that I get stopped out a lot. So it had me thinking that if the position is going the wrong way, I should look for a better entry position (lowering my overall breakeven) and double down , or double my position. My thinking was based on the idea that the move "should be" temporary and if they stock just gets back to my original entry point, I would at least come out ahead, if not at break even. the death by a thousand cuts is definitely a real thing. Thanks so much for adding 'the math' to my internal rationaliion.
I’d also focus in on the variables I mention that make a leg better or worse. And more nuances you pay attention to, better your win rate will become.
Lance: What about skipping entry 1 & 2? Even if they are +EV.
If pos EV, why would you skip? If to leave more firepower, just bet small. In long run will add to your bottom line.
You don’t know which ones will keep going. Many will bounce and you want exposure if pos EV
Yeah it'll work sometimes or you could just get a complete flush. Let's look at the money. You are buying long on the first one. You lose. Let's say you lose $1k. You buy the 2nd one. You lose $500. Now you are upside down $1500..so you have make at least that just to get even. But you can tell easily whether to buy the first turn or not. Is there old support there? Does Time and Sales show a large block of buyers coming in? I use this every day trading futures on a 1 minute chart and it's the best thing I've ever done to make money. The old Time and Sales. There is nothing else that tells you what is happening at the time it is happening. So the futures go down to a pivot or support point and I get green coming in..maybe a block buyer of 300 contracts. Even better is to follow the trend and use it
Anyone, where does he get the probability from? Is he just assuming 60% - 40% on point B for example? How can I calculate my expected value?
Lance! Kudos for this insightful video. I wish it was longer. Thank you.
Could you show me the calculations to get the expected value please
Lance, thanks so much for this video. It uncannily described the problem I've been having and provided an explanation and better yet, a solution. I'm looking forward to implementing it in my trading and expect to see a marked improvement in my P&L. Thanks again.
Thx for listening!
This IS what I Have to train More and IT IS what I just lately Have been trying to do after one year of trading. IMO This consept has quite The Same filosophy behind as The one that always risk More on The best A+ Set ups than others. And More on b Set ups than c. Thank you for The video ❤️🙏
Not sure if it's the same but almost every day I see a hot stock drop below VWAP and the rest of the day traders are slowly pushing it back up until it gets to the top or 1st VWAP line (I call it VWAP jail bars) then it goes back down and sometimes it breaks over.
That's me for most of the time 😂
Great Video Lance, thx for the insight. This is something I have been working on in my trading.
Question in the formula for probability of being wrong seems like the number is inputted as a positive number +$.20 . Should it not be inputted as a negative number -($.20) ? If so it changes the EV. Curious to hear your thoughts as I am working this into all my setups to see where edge is best with RR.
Thx for your time,
Cheers
Crap, you are right! Typo’ed in there. Ruh roh! Thx for catching. Not sure I can fix post production 🤦♂️
@@TheOneLanceB Thx for the reply, will implement accordingly. Appreciate the great content. Helping me a lot !
@@sebastienvillard5359 love to hear it! Ty!
Anyone know any good books for mean reversion strategy
I did the martingale strategy at the casino before I knew it was illegal at the casino. It doesn't work on 1/1 odds tables and it isn't guaranteed to work anyway because they have table limits. There is no law or limits in the stock market so if you have the capital, it will work.
Good topic to bring up given yesterday's sell from the open through the lunch hour
Seems to me this comes down to understanding the best opportunity based on context, not historical win/loss rate. The opportunity exists regardless of how you feel based on current position ( $ and psychological). In essence you talked yourself out of the better probability trade because you were deflated. The math doesn’t lie but you think it is if you don’t understand and/or accept it.
Excellent advice, very helpful 👍
Thank You Lance! As always golden advice. I'm so thankful You are sharing this. God bless!
Haha, Lance calling out the arm chair idiots. You love to see it
Funny ... on Friday I traded the rebound exactly the way Lance described - just not consciously. TGIW !
The video I needed to see this morning.
This is a specific type of trade where no news, random day. Sometimes, the ticker just keep going down. Then the EV is a massive loss.
I prefer the Martingale System with a large bankroll when playing blackjack at either Aria Resort and Casino or Treasure Island. Those 2 casinos have the lowest house edge in Vegas.
Yes, Friday
lance great vid as usual. i understand the math but why would a stock move that dramatically if there was no news at all?
It happens all the time. Stocks move a ton w no news. Some stocks get run up on euphoria. Others have large people that need to sell for unrelated reasons. Others have stops that get triggered due to technical patterns. Zillion reasons
Would like to see your video where you show the 50% retracement after bounce increases for each wave down, since your premise is based on that stat. Tx!
Take anything that trades and cut the leg in half and that’s where the power shift generally takes place. Under 50% is discount and over is a premium $ so as Lance explains so well, one side runs out as the other side steps in well rested and ever more interested.
You can compile charts based on the criteria you’d be looking for and crunch the data to see for yourself. Key variables being some of what I mention - velocity of move, volume capitulation, etc.
4:29 Excellent
It’s interesting how emotional people get trading. I get it but don’t get it. Set a SL and TP for your set up. It’s sound like some people don’t know their set up well enough but trade anyways. You should probably have a good idea what’s the likely outcome and except it. To me it’s easier than poker, I don’t need to get in the mind of anyone and adjust according. There’s no one there to stop you in trading.