Why Math Is Important for Day Trading

90% of traders tend fail at having a profitable week or even month because they fail to understand the math aspect of it.

Imagine being a detective, trying to solve a complex case. You have to gather clues, and analyze the evidence to make a logical to piece together the puzzel.

Day trading is a lot like detective work, it’s all about using math and logic to make sound trading decisions.

Day trading is not just about guessing what direction the price will go. You have to use math and technical analysis to identify opportunities.

Andrew Lo, a professor of finance at MIT once said, “Maybe we should teach schoolchildren probability theory and investment risk management.”

4 Areas of Trading Where Math is Used

1. Defining the Max Amount of Dollars Being Risked on Each Trade

Imagine you’re baking a cake. Before you start mixing ingredients, you need to decide how many cakes you can make. This is similar to risk limit in trading.

Before you enter a trade, you need to determine the math for the maximum amount an account can lose on a trade. This will help you avoid overextending yourself and helps protect your capital.

For example, if I have a $10,000 account value, I’m only willing to lose 5% of my account for a given day. Depending on the trade, I will determine how much I can risk for a trade; typically a max of 10% per trade.

2. Measuring the Distance From Your Stop Based on Technical

Set an effective stop-loss, and you’ll need to use math based on the current price, and where your stop zone is.

For example, let’s say your day trading 1000 shares of Apple (AAPL) and the price support is 50 cents away from the current price.

This means you’re maximum loss for that trade is $500.

3. Defining a Price Target that Is At Least Twice the Distance

When you’re day trading, you need to set a realistic price target, and one with a great reward-to-risk ratio. Using the example above, you need to use math to double the distance from the stop of 50¢. This means you reward has to be at least a $1 distance of price.

4. Adding to Winners and Not To The Losers

Adding to winning trades can boost your profits, but it’s important to remember that the same thing can happen with losing trades.

If you decide to add more money to a winning trade, be sure to move your stop-loss order to the break-even point. This is because adding more money to a trade also increases your potential loss if the stop-loss order gets triggered.

For example, if you double the amount of money you’re invested in a trade, you’ll also double your potential loss if the trade goes against you.