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Don Kaufman here. |
I'm gonna tell you something that's gonna annoy every trader reading this, okay? |
While you're all celebrating this ceasefire rally and chasing airlines because oil's tanking 13%, you're missing the entire point. I don't give a damn whether this ceasefire holds or falls apart from a trading perspective. |
You know what I care about? The fact that you think being right about geopolitics is how you make money. |
It's not. It couldn't be further from the truth. |
The Thing Nobody Wants to Hear About Trade Logic |
Here's what nobody wants to hear, okay? |
Trade logic is number one. Capital allocation is number two. And directional bias? That's tertiary. What's tertiary? It's the third one down. |
I don't give a damn what you think about the market or direction because it will not be a huge bearing on my decision making. |
It's just not. You wanna know why? Because after 27 years, I'm very comfortable saying you will not find the direction of the marketplace. You just won't. |
Let me give you a scenario before I actually take you into this. |
You find the perfect bullish setup. It's beautiful. The setup's beautiful. You're like, oh, this thing is gonna break to the upside. But the skew makes the trade totally ridiculous. |
This is ridiculous, okay? |
You trade that call spread, you lose money, guaranteed. It's a mathematical certainty that you will lose money over time. |
Even if your directional bias is accurate to the tune of 70%, you would still lose money in that bullish trade. Why? Because you dramatically overpaid for it. |
The 72% Probability You Ain't Never Seen Before |
Now I'm gonna take you down a rabbit hole you ain't never seen before. You ready? Because this is gonna get a little bit deep. |
What I'm about to show you can be reproduced by you, okay? But it's not easy to do. |
This is called an in-out spread. What's an in-out spread? It's simple. You buy one strike in the money, sell one strike out of the money. That's it. |
But here's the key - and this is absolutely critical - you never pay more than half the spread width. |
If it's a $2 wide spread, never pay more than a dollar. If it's a $4 wide spread, never pay more than $2, okay? |
Why? Because when you pay more than a dollar for a $2 wide spread, ain't no way it can make 55%. |
But before you can even think about doing an in-out spread, you gotta look at the expected move. |
If the expected move doesn't cover your risk more than twice, don't even bother |
Now here's where it gets interesting. This trade has approximately a 72% probability of making 55% gain or greater before expiration. |
But what happens the other 28% of the time? It's somewhere between zero and a drawdown. |
How do I know that? Because we actually built a Monte Carlo model using real trades that we had done over 20 years of trading, and the trade actually has positive expected returns just keeping the structure intact. |
But here's the thing - and this is where people are not really familiar with this - you have to use some gaming theory in this. It is absolutely essential that you try to risk the exact same amount in every one of your trades because mathematically you don't have an edge. |
I know it's a weird example, but it's also a very pertinent example… |
On Thursday, I'll share with you parts two and three - where I show you exactly how I'm using this 72% probability methodology right now, and why equal allocation is the only thing that makes this work mathematically. |
To your success, |
Don Kaufman |
P.S. for your homework assignment, I want you to look at your last ten trades, specifically how much you risked on them. |
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THE MATRIX EXISTS (IN THE NQ) |
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Tony Rago cracked the code: 10 hidden price patterns 99% of traders never see. |
One shows exactly when institutional money FLOODS in—before the move happens. |
→ Watch The Training Here |
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