In the last article we spoke about how to make a consistent income flipping a coin
If you missed part 1, catch up at the end…
In today’s article, we’ll dive deeper into the mechanics on why the “Flipping a Coin” strategy will be profitable in the long run.
Grab a basket of marbles
Let’s say you buy a basket with 100 marbles.
50 Marbles are white and the other 50 marbles are red.
The game is this.
Once a day at 9am, you’ll dig your hand in the basket of marbles, and take out just one and put it on your table.
You’ll assign each marble with an amount you can win and an amount you can lose.
Imagine that with every white marble you pick up, you make R1 and with every red marble you pick up you lose R1.
After 100 days you would have picked up 50 white marbles with an accumulative value of R50.
You would have also picked up 50 red marbles with an accumulative value of -R50.
So all in all, with a risk to reward of 1 to 1, you would have broken even.
R50 – R50 = R0.
However with the trading world it’s a little different.
Trading is NOT a zero-sum game
You would have ended up with a negative portfolio value and would have been out of the game a long time ago.
This is because of real life factors such as:
1. Slippage (Not getting in at the price you wanted)
2. Trading costs (unavoidable)
3. Margin call (When the broker closes your account)
4. Gaps (When the market jumps past your stop loss)
So with this little experiment and with, our Coin Trading System, we know we can’t risk the same amount as we’re hoping to gain.
So what do we do to make sure the coin flipping strategy is a success?
Let’s go back to our marbles…
How to profit using the marble strategy!
Very easy. We need to assign the value of what we’re willing to risk per marble (trade) less than the amount we expect to gain per marble (trade).
We will assign the white marble with a gain of R2 and we will assign the red marble with a loss of -R1.
After another 100 days of picking up marbles, your portfolio value will look something like this.
(50 White marbles x R2 value) – (50 Red marbles X -R1)
= (R100 – R50)
= R50 profit!
Even with a 50% win rate strategy and with a risk to reward of 1 to 2, you’ll still pocket R50 profit.
What if we upped the stakes and assigned the white marble with R5 each and the red marble with a value of -R1?
(50 white marbles X R5 value) – (50 Red marbles X -R1)
= (R250 – R50)
= R200 profit.
This means with the same 50% win rate system and with a risk to reward of 1 to 5, you’ll end up with R200 in gains.
Even with a 20% win rate, you’ll end up profitable with this system. (I’ll save this for another article, before I go off on a tangent).
Back to the “Coin Flipping” strategy
Technically when you follow this coin strategy on a highly traded market i.e. JSE ALSI 40, with an expected win rate of 50%, and you risk around to 2% of your portfolio in order to make 4% of your portfolio per trade, you’ll profit in the medium to long run…
Here’s a summary of the Coin Flipping Trading System:
Here’s the criteria:
FIRST – Find a handful of markets to trade
Only choose high liquid, highly traded and established stocks or indices e.g the JSE All Share Index or any other main stock index.
SECOND – Flip a coin at market open
As soon as the market opens you flip a coin to see what you’ll buy or sell.
Heads – you buy (go long)
Tails – you sell (go short)
THIRD – Place stop loss below or above a strong level
~ If you buy (go long) place your stop loss price below a strong support level.
~ If you sell (go short) place your stop loss above a strong resistance level.
FOURTH – Use my consistent formula for placing your take profit
With the take profit price level you’ll use my standard calculation for when you buy (go long) or sell (go short).
BUY: Take profit price = [(Entry – Stop loss) X 2] + Entry
SELL: Take profit price = [(Entry – Stop loss) X 2] + Entry
Ok, you got the strategy down…
Take down notes, get rid of any distractions and let me know your thoughts on the Coin Flipping Strategy or let me know if you’d like me to make a video on the strategy by emailing me at Timon@TimonAndMATI.com
Founder, MATI Trader