# In­vest DIY: A sim­ple rule for trad­ing

## Be­fore you start trad­ing, make sure that you un­der­stand the fun­da­men­tals. Here are a few ba­sic rules to keep in mind to en­sure that you make a profit.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za

iwant to talk about trad­ing this week. Not trad­ing strate­gies or where to put the sto­ploss or what de­riv­a­tive prod­uct to trade or time frame to use – rather, I want to start with a sim­ple anal­ogy that will hope­fully help you un­der­stand the sim­ple prob­a­bil­ity in­volved in trad­ing. By im­ple­ment­ing some ba­sic rules, we can use this to our ad­van­tage.

Let’s start by toss­ing a coin, and let­ting it land on the ground. Ev­ery time it lands on heads we make 100c and ev­ery time it lands on tails we lose 100c. Af­ter enough coin tosses we’ll end up with an equal num­ber of heads and tails, and we would have made zero profit. Equally, we would have made zero loss. We’ll be ex­actly where we were when we started.

Now let’s add a coloured square on the ground, cov­er­ing about a fifth of the to­tal area where the coin is land­ing. If the coin lands in that square af­ter we toss it, our profit or loss will be tripled.

So, we’ll make 300c when it lands on heads and lose 300c when it lands on tails. If the coin lands out­side the square the nor­mal rules ap­ply – a profit of 100c for heads and a 100c loss for tails.

Again, af­ter enough coin tosses we’d have made no profit with the losses off­set­ting the win­ners.

What if we change the sce­nario? So ev­ery time the coin landed on tails in the square, in­stead of los­ing 300c, we only lost 100c. Now we have two ways to lose 100c, one way to make 100c and another in which we make 300c. Af­ter enough coin tosses we would have made a profit as the coin would have landed on heads and tails within the square an equal num­ber of times, but on tails we only lost 100c and on heads we made 300c.