The Power Of Mathematics

There is an article Maths + Statistics = Great Beach Reading  on Bloomberg, which was discussing the good points of a book named “How not to be wrong”. According to the article, the author of the book shows, the power of mathematical thinking and how mathematics and statistics help us understand the world better.

Trading also depends on mathematics and statistics at great extent and directly affects the outcome. It  is widely used for calculating stops, targets and risk from a trade. Identifying risk from a particular trade is a much more necessary work for better trading and helps us to identify whether to enter in a trade or not, what is the risk/reward ratio in it and what are the odds of success of that trade.

For example, suppose a stock rallied from 100 to 150, corrected to the level of 140 and bounce back from that level and touched level of 144. If we want to enter in that stock on the long side, then the risk/reward ratio will be 4/6 means we are risking 4 rupees for a reward of 6 rupees(and if the stock breakout from resistance then we can touch higher levels, so the reward could be even more). So this is a good trade, as we are risking less compared to reward and our risk is also pre-calculated and fixed.

This is the most simple and fruitful use of mathematics in trading, otherwise it is also used for calculating and making every indicator also. Identifying risk earlier before entering into a trade is much more beneficiary for trader and helps to pick up the more fruitful and less risky trades.