Part B · Trade — Chapter 8
Setup math: RR × probability × situation; sizing
After this: judge a setup on all three of his aspects, and size it from the stop in one line of math.
Three aspects of every trade
Risk-reward, perceived probability, and your personal situation. The first two make a setup. The third is "the most important" and the one a setup ignores. It applies to trading and investing alike.
You only ever perceive probability
In blackjack a hard 16 against a face card has a known answer: hit. "We don't have that luxury in trading", so we perceive the odds from price action. You skew them with structure: to downtrend on a higher timeframe, price must downtrend on a lower one first (the snowball).
▶ RR + Prob 2:30 ▶ RR + Prob 3:09 ▶ RR + Prob 3:20 ▶ RR + Prob 3:50 both
12.4R isn't better than 2.1R
His chart showed two longs: a 12.4R reversal against the trend and a 2.1R trade with it. The big R comes with low probability. The 12.5R taker is "the same person who tried to buy the dip here and there and there".
Your situation can flip the same trade
With 90% of net worth already exposed, an extra 12R low-probability reversal does little. If you're under-exposed or net-negative, the same trade works as a "long hedge" and may be worth it. Personal situation goes deep: income, savings, what you can afford to lose, family and mortgage vs risk-aggressive. "If you master this one… drawing the setups becomes second nature."
▶ RR + Prob 4:42 ▶ RR + Prob 5:20 ▶ RR + Prob 5:53 ▶ RR + Prob 6:40 ▶ RR + Prob 7:08 both
Driving to work
Every commute is a trade. The risk is a crash, the reward is getting to work, and the perceived probability of a crash is low. Change one aspect and the decision changes.
| Day | What changed | Decision |
|---|---|---|
| Normal | nothing | drive |
| Fog / ice | probability skewed | call in |
| Won the lottery | personal situation | don't need to drive |
Aim for the middle
Stop taking high-probability/low-RR trades, and stop taking high-RR/low-probability ones. "Find setups that I perceive to be decently probable with solid risk reward." His Google analogy: the 23-year-old grad has low probability, low risk and a huge reward. The 50-year-old expert has high probability, high risk and a low reward. "You want to find yourself somewhere in between."
▶ RR + Prob 10:05 ▶ RR + Prob 11:02 ▶ RR + Prob 11:12 ▶ RR + Prob 14:26 ▶ RR + Prob 16:36 both
50% winners at 6R is a winning system
His reclaim-continuation setups work "about half the time". With 1R losses and ~6R winners (he quoted 5.6R and 6–7R on real charts), that's a winning mindset over the long run. "Even if just one out of ten times that happens you're going to be profitable."
▶ Level to Watch 12:56 ▶ Top 5 + BTC 5:40 ▶ Top 5 + BTC 7:13 ▶ Watchlist W17 6:51 both
Size from the stop
risk $ = account × 1%, and position = risk $ ÷ stop % (as a decimal). His numbers: a $10,000 account risks $100. With a 2% stop the position is 100 ÷ 0.02 = $5,000. With a 10% stop it's $1,000. A wider stop means a smaller position, and the loss stays the same either way. "Don't ever risk more than what you need to risk."
| Stop distance | Risk ($10k × 1%) | Position |
|---|---|---|
| 2% | $100 | $5,000 |
| 5% (same formula) | $100 | $2,000 |
| 10% | $100 | $1,000 |
▶ Leverage 7:43 ▶ Leverage 7:51 ▶ Leverage 8:09 ▶ Leverage 8:30 ▶ Leverage 10:07 ▶ Leverage 11:14 both
If → then
- Position = (account × risk %) ÷ stop %. Default risk 1%.
- Wider stop → smaller position, never bigger risk.
- High R, low probability (bottom-catch) → skip. Look for decent probability with solid R.
- Already heavily exposed → an extra speculative long adds little. Pass.
- ~50% win rate with ~6R winners → take the setup every time it appears.
- Beginner → static risk. Size up only on A+ confluence, and only later.