This chapter presents a structured approach to trading based on probability, reward, and risk. Key points include:
Trading edges are small and temporary; no setup works all the time.
The trader’s equation links probability, reward, and risk to determine whether a trade has positive expectation.
Probabilities are best estimated in broad bands (40%, 50%, 60%) rather than precise numbers.
Reward requirements must adjust to probability: lower probability requires larger reward relative to risk.
Market structure (breakouts, channels, ranges) strongly influences probability, trade type, and management.
Institutions and algorithms dominate markets; emotion is a major source of trader error.
By applying the trader’s equation consistently and accepting uncertainty, traders can develop a disciplined, probabilistic approach to market participation.