Coin Toss Exercise
The exercise below should result in you losing +/- 50% of the
time. It will however show you how you can make money
losing 50% of the time while having fun and enjoying the
losing experience. This is the attitude you must possess in
order to become a consistent trader as it'll will help you
manage your emotions and think more in probabilities.
You need to develop a numbness towards losses. This
numbness comes from the fact that you are not risking your
house or future on each trade but only 1% of your trading
capital. This will give you the mental, psychological and
trading edge you need over the market.
** PLEASE DO THIS EXERCISE (It is more important than you will ever realise) **
Open a Spreadsheet. One column for Heads and one column for Tails. Also add profit/loss
and balance columns.
Manage Risk for the Conservative trader
Imagine that you have £1000 to trade with.
You can therefore risk £10 per trade. Now find the biggest coin used by your local currency.
You need to spin this coin 100 times.
Pay yourself £15 for every Heads you get and deduct £10 for every Tails you get.
Start spinning and calculating your account balance.
The first 10 to 20 spins you will notice that you are quite tense about the outcome of every
spin and very interested in the outcome (emotional).
After a while you realise that the odds are stacked so favourable in your favour that you
losses do not hurt at all. They actually become an opportunity for a fresh spin.
Likely Outcome
You should make an estimated +/- £250 profit (25% Return on your money). (50% x -£1000 =
-£500) + (50% x +£15 = £750) = £250
** PLEASE DO THIS EXERCISE (It is more important than you will ever realise) **
** PLEASE DO THIS EXERCISE (It is more important than you will ever realise) **
------Bonus Exercise------
Manage Risk for the aggressive trader
Imagine that you have £1000 to trade with.
You can therefore risk £10 per trade. Now find the biggest coin used by your local currency.
You need to spin this coin 100 times.
Pay yourself £15 for every Heads you get and deduct £10 for every Tails you get.
Start spinning and calculating your account balance.
Once your account balance reaches £1100 increase your bets. Pay yourself £30 for a Heads
and deduct £20 for a loss Tails). In other words, double your lots.
If your account goes back to £1000 return to the normal bets.
Once your account reaches £1300 increase your bets. Pay yourself £45 for a Heads and
deduct £30 for a loss Tails (add another lot).
If your account goes back to £1100 apply the bets as at that level
If your account goes back to £1000 return to the normal bets.
Once your account reaches £1600 increase your bets. Pay yourself £60 for a Heads and
deduct £40 for a loss Tails (add another lot).
If your account goes back to £1300 apply the bets as at that level
If your account goes back to £1100 apply the bets as at that level
If your account goes back to £1000 return to the normal bets.
Likely Outcome
The likely outcome after 20 spins is (20 x -£10 = -£200) + (20 x £15 = £300) = £100
The likely outcome after the next 20 spins is (20 x -£20 = -£400) + (20 x £30 = £600) = £200
The likely outcome after the next 20 spins is (20 x -£30 = -£600) + (20 x £45 = £900) = £300
The likely outcome after the next 20 spins is (20 x -£40 = -£800) + (20 x £60 = £1200) = £400
TOTAL = £1000
You have doubled your money in +/- 80 spins.
** PLEASE DO THIS EXERCISE (It is more important than you will ever realise) **
