Reviewing trades offers the opportunity to unpack the impact of random probability upon a sequence of trading events. An extremely simplified view of probability theory relative to trading goes something like this: A prolonged sequence of futures (or FX, equities, cryptos – pick your poison) trades with a fixed $1000 profit target and a fixed risk of $1000 (normalized for underlying trends) should produce profits in 50% of the trades. A net loss would occur over time due to trading fees. A prolonged sequence of futures trades with a fixed $2000 profit target and fixed risk of $1000 risk (normalized for underlying trends) should produce profits in approximately 33% of the trades. I would have a “killer” trading program if I could achieve a 50% win rate with a 2:1 win-size/loss-size ratio. A prolonged sequence of futures trades with a fixed $4000 profit target and fixed risk of $1000 risk (normalized for underlying trends) should produce profits in approximately 20% of the trades. Just imagine how profitable this profile would be if only 1/3rd of trades scored a win. Many traders only enter trades with a profit/risk ratio of 3:1. I understand the concept behind this – although I do not pay much attention to profit-potential/risk ratios in my own trading because I move my stop aggressively even though I may hold fast to a target. Active and aggressive trade management DRAMATICALLY alters the probability calculus. While the math is complex, think of it this way: My five year ratio of avg. profit size to avg. loss size is 3.8 to 1 My five year Profit Factor (PF) is 5.1 IMO, the PF is a better metric to reflect the projected ratio of win-size/loss-size for the purpose of understanding the impact of random probability. A 5.1 metric is the rough equivalent of rolling the number 1 on a six-sided die (the probability is 1/6 or 16.6%). It is interesting to note that this percentage figure is similar to the percent of trading events that tend to put in my bottom line in most years. Coincidence? No. Random probability theory applies best to the “law of large numbers.” Over a shorter series of events just about anything can happen. The point of this discussion is that thinking of trading in terms of “win-rate” over an extended period of time is a meaningless metric. I encourage traders to investigate a deeper understanding of the calculus of trading. My three “take-aways” from this discussion are: 1. Avoid using simplistic performance metrics such as “win-rate” to understand the dynamics of a trading approach/program. 2. Trade identification (the “signal”) is far less important than risk and trade management. 3. Protecting one’s pile of chips is job #1. All approaches to market speculation run into losing streaks. Things will eventually get sorted out as long as the pile of chips remains mostly intact.

The cumulative A/D line for the S&P 500 remains close to a new high. I continue to view the S&P breadth to be positive for U.S. equities. DJIA (CBOT) The DJIA has been unable to make a new high for the past 18 months. This is also true for the S&P 500. My thinking is that a decisive new high by these two indexes confirmed by a new high in the S&P A/D is required to put the cyclic bull trend back on track. The Factor Tracking Account is long the micro Dow Index. S&Ps (CME) A decisive close above 3021 would be a breakout on the S&P chart. Such a close would establish a target of 3640. Factor is flat. I will buy S&Ps if it breaks out before Dow futures. I would not wait for 3021 before acting. https://www.peterlbrandt.com

The S&P cumulative A/D line is rolling over – the type of rollover experienced in the 4th quarter of 2018 is still not visible. Most Global Equity Markets are in strong down-trends or completed significant top patterns this past week. S&P 500 (CME) The daily chart has completed a H&S top pattern with a target of 2632. NY Composite Index NYA has completed a H&S top. Note that my charting style ignores the early Mar decline. I make no attempt to include this price action as part of the H&S top. I always prefer a horizontal neckline to a slanted neckline. NASDAQ (CME) The decline on through the neckline of an H&S top on the daily graph, thus providing a sell signal. Factor is short. All major U.S equity indexes as well as many global indexes displayed clearly defined bearish chart patterns – as a result I extended my sizing on this trade relative to many recent trades, still remaining well under 100 BPs for a risk level. I already began squeezing out risk by the close on Friday by advancing stop protection. Nikkei Dow (CME) Perhaps the cleanest H&S breakdown belongs to the Nikkei Dow. The CME contract is shown, although I typically trade the Nikkei at the Osaka Stock Exchange.

Gold (NYMEX) The possibility of a massive inverted H&S pattern on the monthly graph is noted once again. The daily chart displays a small H&S top pattern. A completion of this H&S top would do some damage to the near-term bullish case. Platinum (NYMEX) The WBB advance on Thursday completed a 7- month ascending triangle on the daily chart. Support should exist at the 881 level. The target is 1001. The breakout of this pattern occurred during my nighttime hours and Platinum is a market in which I do not use overnight entry stops. Factor is flat in the futures market. Instead I bought PPLT, the Platinum ETF as a means to more precisely control sizing. The target on the PPLT daily chart is 92.14.