The sad truth is that futures trading is a ruthless, zero-sum game. Pretty bad odds by anybody’s standards, yet people are drawn to this business like moths to a porch light and continually return, only to lose over and over again.
So, how does the 5% do it?
Well, in order to understand how the 5% consistently makes money in this business, let’s begin not by talking about trading. Instead, let’s talk about a Roulette Wheel. As you can see, the wheel has 36 numbers randomly placed around the perimeter of the wheel.
For this discussion, let’s limit the kind of betting you can do to the most simple:
Betting on an EVEN number
Betting on an ODD number
If you’re right, the payoff is ‘even money.’ That is, you win an amount equal to your bet. Easy, right? That’s why millions of people flock to casinos across the globe every year, isn’t it?
Not so fast…
If that was the whole story about the wheel and the payoff, you’d be on mathematically equal ground with the casino, which is called ‘even odds,’ and as far as casinos go, a pretty good place to be.
In the above scenario, if you bet $100 on an EVEN/ODD outcome, here’s the casino’s expectation for playing the game against you:
And here’s your expectation for playing the same game against the casino:
Your winning percentage = 50% (18 ÷ 36 = 50%)
Your average winning amount = $100
Your average losing amount = $100
But that’s NOT the whole story of the Roulette Wheel. As you can see above, the wheel has two additional slots:
One marked ZERO and
The other marked ZERO-ZERO; “The Double Zero.”
Those two slots are what give the casino an unbeatable mathematical edge, because now, when you bet EVEN or ODD, you have 18 chances to win out of 38 possible slots for the ball, rather than 36.
Now, here’s how the math works out:
Your winning percentage = 47.37% (18 ÷ 38 = 47.37%)
Your losing percentage = 52.63% (20 ÷ 38 = 52.63%)
Your average winning amount = $47.37 ($100 x 47.37% = $47.37)
Your average losing amount = $52.63 ($100 x 52.63% = $52.63)
So, as a player against the casino, you have a net NEGATIVE expectancy:
Your average win is $47.63
Your average loss is $52.63
Which gives you a negative expectancy of -$5.26 EVERY time you play
That means the casino has a Net Positive Expectancy of $5.26 because:
They added the ZERO to the wheel
They added the DOUBLE ZERO to the wheel
They have created an undeniable mathematical advantage in their favor
Here’s the sobering truth:
If you sit down to play roulette, over time, the casino WILL take ALL of your money because they’re using The Secret of the Double Zero to grab profits spin after spin after spin after spin. Similarly, if you sit down to trade and you don’t know what your own expectancy is, guess what? You’re part of the 95%. Most traders have NO IDEA what their expectancy is from trading and the fact that they lose money proves that their net expectancy is NEGATIVE.
THAT’S THE #1 REASON 95% OF TRADERS LOSE MONEY
What about the other 5%? What’s their secret?
They have a trading plan
Their plan has a net POSITIVE expectancy
They take money from the other 95% day after day after day
The Secret of the Double Zero, the secret of having a net positive expectancy, is true whether you trade stocks, futures or currencies. It’s true whether you trade intraday, inter-day, short term or long term. It’s true regardless of your trading method. Whatever you do as a trader, if it doesn’t have a net positive expectancy, you WILL lose your money…eventually…because the laws of mathematics will not be denied.
"Commodity Trading Involves Substantial Risk of Loss and past results are not necessarily indicative of future results"