Six Key Factors for Successful Investment - Cryptocurrency Digital Asset Exchange Platform

Suppose we base our trading or investing decisions on the following factors:

(1) Reliability, or how much time is spent making money. For example, if you make 10 stock trades and 6 of them are profitable, then your reliability is 60%, which equals the number of profitable trades divided by the total number of trades. Sometimes reliability is also called “hit rate.” Essentially, it is the percentage of correct timing in your investment system.

(2) The relative size of profits and losses. When trading at the smallest possible level, such as 1 share of stock or 1 futures contract. For example, if you lose $1 per share on a failed trade but earn $1 per share on a successful trade, then the relative size of profit and loss is the same. However, if your successful trades earn $10 per share and your failed trades lose only $1 per share, the relative sizes are quite different: now it’s 10 to 1.

By comparing the average size of successful and unsuccessful trades, you can get a better understanding of the relative size of profits and losses. You might have a large profit position and many small loss positions, so this isn’t an exact measure. A more precise measure is to consider the return as a multiple of the initial risk ® you take during trading. Therefore, your returns could be a full series of R multiples. For example, if you are willing to risk only $500 on a trade—that is, you will exit immediately if you lose $500—your basic risk is $500. Thus, a $1000 profit is a 2R multiple, and a $5000 profit is a 10R multiple. If, due to some unexpected event, you lose $1000, then you have a 2R loss.

(3) The costs of trading or investing. Due to execution costs and commissions, whenever you trade, it exerts a destructive pressure on your account size. People generally include these costs when calculating average gains or losses. It’s wise to pay attention to how much these costs impact you.

(4) The frequency of trading opportunities. Now, assuming the first three factors are fixed, their combined effect depends on how often you trade. For example, the combined effect of the first three factors might be that risking $1 can yield a profit of $0.20, meaning if you make 100 trades each risking $100, you end up with a total profit of $2000. But now, imagine if it takes one day to complete 100 trades, and you can earn $2000 per day. Comparing this to a system that only makes 100 trades per year and earns only $2000 annually shows that opportunity factors can cause significant differences.

(5) The scale of trading or investment capital. The effects of the first four factors on your account largely depend on your account size. For example, even trading costs can have a big impact on a $1000 account—if the trading cost is $100, then each trade takes a 10% hit before you even profit. To cover these trading costs, the average profit per trade must exceed 10%. However, if you have a $1 million account, the same $100 trading cost impact is negligible.

(6) Position adjustment models. How many units do you trade at once? Clearly, the profit or loss per share must be multiplied by the number of shares traded.

Different trades may have different risk levels, i.e., different R values. Therefore, a 1R loss might mean different things for Trade X and Trade Y. This value is introduced through position sizing adjustments. For example, risking a fixed percentage of assets, such as 1%, and making each 1R risk equal. If you have $100,000, then you risk only $1,000 per position—that is, 1%. So, if 1R is just $1 in one trade, you buy 1000 shares. If 1R is $10 in another trade, you buy 100 shares. In each case, your 1R risk remains a constant, representing 1% of your capital.

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Are you willing to focus only on one of these six factors? Or do you think all six are equally important? But if you focus all your energy on just one of these six factors, which one would it be?

The reason I ask you to concentrate on one factor is because many traders or investors in their daily activities only focus on one of these six factors. People are often troubled by one factor and exclude the others.

The first four factors are part of what I call the expected return theme. The last two factors are part of what I refer to as capital management and position sizing.