Inverse Trading

Yachts, boats, cars, planes, piles of cold hard cash, stacks on stacks!

We all have a “Ponke” in us. Ponke is a degenerate gambler that lives on the Solana Blockchain. Do follow him on Instagram under the handle @ponkesolana. Relatable and entertaining content for us degenerates staking our life savings on red and green candles. 

All trading is essentially gambling. Do it with risk management and you can call yourself a trader or if you feel a lil bougie amongst the chaff, you’re a speculator. Some of the most prolific and profitable traders, before they started trading were fascinated by games of odds and how to beat the system. Games such as Blackjack and Poker are not just games of skill but rather games of probabilities first. Provided that you have a statistical edge, you bankroll your bets and over a large number of bets you eventually make money, this is the skill, at least thats the idea. Building any kind of trading system requires you to utilise logic which is derived from games of chances. Each candlestick is like a coin toss, a walk in randomness. How is a Roulette Wheel with black and red numbers any different from red and green candles? There’s 2 green boxes in American Roulette with the number 0 and 00 reducing your odds to a little under 50% ( to that of a fair coin toss ) around 47%, European Roulette only has 1 Green Box with the number 0 so the house edge is a little less and slightly more favourable to players, around 48.65%. How is this any different from trading with green and red candles and every time you buy and sell, you pay a spread or spread + commission, effectively reducing your odds under 50%. 

I don’t know who’s reading this clickbaity blog post and what value the reader can derive from this but pondering over questions like this is how you learn how to trade as you find processes to make better trading decisions, build trading systems based on odds and incorporate sound ideas into your trading plan. 

If we start with an initial capital of 100$ and double our initial investment on each trade, essentially (YOLO) it into the next trade. If we do this 10 times with a 1:1 Risk to Reward ratio, we get to 100,000$ over 10 trades. This system is not unique to the markets, its been around since ages, its called Parley Bets, where you place a bet and the outcome of the bet is based upon independent events. Its very popular type of bet in horse racing. Sounds good, right?

Here’s how $100 doubles step by step:

1. Start: $100

2. First double: $200

3. Second double: $400

4. Third double: $800

5. Fourth double: $1,600

6. Fifth double: $3,200

7. Sixth double: $6,400

8. Seventh double: $12,800

9. Eighth double: $25,600

10. Ninth double: $51,200

11. Tenth double: $102,400

Salivating numbers, indeed .. 

Let’s analyse the odds of achieving this seemingly simple feat.

0.5×0.5×0.5×0.5×0.5×0.5×0.5×0.5×0.5×0.5 ( assuming 50% odds )

= 0.0009765625 which is approximately 0.098%.

So, a little less than 0.01% or a little less than 1 in 10,000!

Definitely better odds than most lotteries out there! So the next time, your friend decides to buy a lottery ticket, tell him you have a better system in place and he can bankroll you instead. 

Another idea tickles my brain. We assumed the odds to be 50% but what if we possess an edge of 5%? ( somewhat high is what some will say but of course no institutional traders are here, for our retail forex trading degenerates this edge is minuscule ), but how does this impact our odds?

Here we go ChatGPT. Get to work, slave!

Multiplying 0.55 by itself 10 times gives approximately 0.0025.

To convert 0.0025329 to percentage terms: 0.0025329 × 100 = 0.2533% or 1 in 395 odds!

Infinitely better odds than 1 in 10,000 with just a 5% edge. ( Strikethrough for the institutional traders, please hire me, much thanks ). With a 5% edge our odds improve from 1 in 10,000 to 1 in 395 which makes this event 25 times more likely to occur. Lets think about this for a second, 

Assuming initial capital of 100$ we would likely have to lose 395 times for a total of 39,500 USD ( cost of executing this 10 trade parley ) which would net us 102,000 USD roughly minus 39,500 leading to a net profit of 62,500 roughly which is a net Risk to Reward of 2.58.

Unlike our institutional friends at Citadel making 400,000 a year, brokie retail traders like us are the ones who believe we can, perhaps we have nothing better to look forward to, where the hope that money can actually flow from realistically so we really work with what we have. We see things where there aren’t, we are humans after all, albeit stupid humans because we make the brokers rich and provide liquidity at our expense. As a losing trader, never tell anyone you lose money in the markets, what we are is an LP. We’re liquidity providers making markets more efficient. The scale of our operations individually is limited but we serve a selfless purpose, to reduce the difference between the bid and the ask so please give us our due thanks. We are the reason why markets are liquid and efficient and the economy functions well.

Ok let’s think about our problem at hand a little more if we are going to attempt to do this intelligently. A 5% edge is not only possible but doable at times because markets are irrational. When we compared a roulette wheel to candlesticks, what we did not account for is human behaviour as the odds are not constant. There are periods where it is possible to reasonably gauge the direction. In a bull market, most assets tend to go up so the probability to begin with is not 50/50 but rather becomes a little skewed towards upside. The natural direction of stocks of good stable companies is upwards as there is a business at the backend making actual money and it is natural to buy stocks ( invest ) rather than sell, so its safe to say that net there’s more buyers than sellers most of the time. This is one of the reasons Put Options are inherently more expensive than Call Options as it is more natural that however many entities that are holding the stock would want to buy downside insurance in an adverse event.

There are always trends in the markets because of whatever reason, monetary policy or geopolitical reasons, so fundamentals in fact can be leveraged in favour to improve the odds to try to attempt this. Everyone holding bags is waiting for Bitcoin dominance to falter and altcoin season to start which we could see coming to fruition because lets be honest, most of the orders in any market today are made by algorithmic trading systems to exploit the tiniest of edges and once a certain numbers of humans start believing and buying, more follow suit as prices go up and the algos come in adding fuel to fire, it kind of becomes a chain reaction which almost always gets out of control and turns into a bubble with inflated asset prices that are completely out of touch with reality but hey, we humans love to gamble. All of us want that adrenaline rush that comes with making an insane deal of life altering money. Not only is it money, it is glory. Worse case, we can show off our loss porn to the next generation that comes. 

An example of another recent trend in the FX Market has been Dollar strength as there was good data out there to reasonably make the assumption that Donald Trump was going to be the likely winner of the 2024 US Elections. Chalk it down to his charisma or the sheer stupidity of Democrats in being so out of touch with the voters that most people actually correctly predicted the outcome of this election on Polymarket and other platforms. So this was a reasonably good bet with high likelihood that actually happened and we saw Dollar strengthening against other majors and minors significantly. Having the foresight to see this unfolding involves confidence in your assessment which comes with time but if you correctly predicted this outcome and the result of this outcome ( Dollar Strength ) is widely accepted because of Trump’s policies that this would happen. Now if you leveraged 10 trades in a downward market your odds are better. We calculated how 5% affected the odds by a whopping 25X so any little edge in execution helps. Remember, there’s a lot of visionaries out there but execution is where most fail as it is something extremely difficult to do no matter what business you are in.

How do we improve our odds further? Improving odds further requires being in the right mindset ( Psychology ). This is something that I just chalked it off as a beginner, I still remember. I used to scoff at the idea of psychology which goes to show how much of what we believe affects our mindset and anybody with a little bit of experience in the markets knows how crucial of a role psychology plays in trading success. But psychology does not exist in a vacuum. We have to build a holistic trading system to be able to make a profit. You cannot read a ton of books or watch YouTube videos about psychology and then size up and risk 50% of your account and not be emotional. Money that matters to you will always make you emotional. You cannot be in the presence of a stunning woman and expect your heart not to flutter but men who are good with women, first, have more experience and abundance, more experience and abundance = better emotional management, more trades = better emotional management. There is a reason why rich get richer and money attracts money. Of course, this doesn’t entail overtrading but trading within the plan you have set out and successfully following the system with bankroll that is sufficient enough to make it worthwhile for you but not high enough to make you make emotional decisions based on your account size. Considering the example at hand, if you were to follow this system of 10 Parley trades with 5% edge and have a starting bankroll of 100,000$, how emotional would you be when after 395 trades ( losing sequences of under 10 ) when you finally get to the 1 Parley that works? This is the business of trading and it is extremely challenging as it forces you to go to war with your ingrained habits and behaviours. 

Up till now we have covered various odd improving methods. Here’s a summary:

1: We can utilise FX Option Chains to gauge directional bias based on volatility. We can also gauge the volatility based on recent candle formations on chosen timeframe or use Average True Range (ATR) and compare its daily figure to 14day moving average of ATR to assess if volatility is increasing or decreasing if we are using D1 Timeframe. We can confirm the placement of our stop loss so its not too tight.

2: We stay updated on high volatility news events to not be caught in a period of high volatility and have our stops blown out by fluctuations. We also should be aware that at times, exchange rates ( or any asset be it Stocks or CFDs, indices etc ) form a trend and start moving before the event. The time of the event itself can be a dud or a retrace, we could also see trend forming after the news. It is variable which is why it is best to be apprised as we only take the 10 most high probability, high confidence trades. A shred of doubt and we don’t enter the trade. Remember, gut feel and confidence plays a key factor here. We are not working at Renaissance Technologies with PhDs where trades are backed by Machine Learning and Optimisation based, trained on data models with low risk and billions of dollars at disposal. Gut feel does not play a factor there. 

3: Identifying and capturing high probability trends can play a huge factor in achieving success in trading. Case in point, I flipped a 3000$ account to over 20,000$ in 2014. The trigger? OPEC meeting in which they could not reach an agreement to curb production of crude oil and crude prices fell everyday eventually reaching a low of 35-40$ a barrel I forget but I kept shorting based on my system ( Different system ) but also a form gambling as it was not in line with risk. Everyday I placed multiple sell limit orders above market prices at various Resistance Levels and entered on bounces and closed everyday. Most recent and current trend being Dollar Strength of Donald Trumps win in 2024 US Election on Nov 5, 2024. Before this, we could see that the BOJ policy was one of Quantitative Easing and keeping interest rates negative which kept weakening the yen. The policy has seen some change in the past year with positive 0.1% interest rate now but yen is still weakening because of the wide interest rate differential and US dollar strength so many of us could see this coming and could look to short the yen with improved odds. 2020 Bull Market in Crypto could be foreseen as most of us were home, most of us lucky enough to live in developed countries were receiving monthly cheques from the Government and could figure that men with nothing to do resort to gambling with stimulus cheques coming in every month. Always! It’s always gambling but in different forms and under a fancy name. We saw the rise of cryptocurrencies. All of this could be foreseen, many of us did foresee, some of us took action and then a very few of us were prepared and armed with the knowledge to really leverage the situation and make big bucks. In a bull market they say everyone is a genius. Well, this is why they say what they say. If everything is going up and you are successfully able to buy into a streak, that is the best time and market to try your luck. During this Covid Period, another trend that could be foreseen was falling crude prices and that was bound to happen as most industries were closed apart from essential and if you saw this happening and took advantage that is where the money lies. We actually saw negative Crude Oil future prices for the first time in history, imagine that, getting paid to take delivery of crude, but then again trading was halted in these contracts and you could not find a place to store all that oil anyway which is why rates went negative anyway. Opportunities always come, all that matters is that you’re aware enough to recognise them with some research and staying up to date with events and kick in with your solid trading plan in line with your psychology.

4: Take a notepad and pen or open the notes app on your phone and figure out yourself, what kind of person you are, what your personality is, what kind of trades are you comfortable with? How long can you hold a trade? What kind of maximum drawdown to equity ( Floating losses ) to your account can you stomach before making emotional decisions? Your trading system should be in line with your personality and beliefs for you to follow it. What kind of day job do you hold? Can you multitask? Can you make a quick decision on the spot? That also a financial decision with money on line. Psychological reasearch suggests that most humans are not capable of making more than 2-3 financial decisions a day so is it really a wise idea to buy on your phone when you get alerted by TradingView when your attention is diverted elsewhere as well? How often do you feel FOMO? What timeframe is most suitable to you. These are all things that really matter. You cannot start off on an unsustainable path. All that does is reduce the money you have while giving you stress and leading to a burnout. If your intraday job doesn’t allow you to trade a specific way, maybe move away from lower timeframes and trade off D1 charts where you make end of day decisions. The end goal is to make money, not lose money. You can make the same amount of money trading higher timeframes.

To be continued ..

We are not nearly done with this thread of 10 Parley Trades. In Part 2, we would explore various themes upon the 10 trade Parley, their odds, more odds improving methodologies, impulse movements, inverting the parlay and much more. Stay tuned!