# Positive Expectancy When Trading Hot Penny Stocks Or Any Asset Class

Knowledge and experienced based guessing is what results in a positive expectancy in the market and in trading hot penny stocks. I have a statistical edge because of this but you must understand what that actually means. It does not mean I make money every time and it does not mean it will work for ever, but on average my net winning trades are greater than my net losing trades, and my strategy has worked for quite a while and will most likely continue to work. Basically I have identified a series of patterns which result in an asset doing what I expect it will do more often than it does not. Backtesting is how I initially identify a statistical edge which is what I did before I traded with real money and what I do when I am looking for a new strategy to trade a different market. When trading stocks without leverage (margin) you only need to be right more than 50% of the time to make money. In leveraged assets you can be correct only 30% of time and still make money.

## Trading Stocks or Penny Stocks

I place 10 trades and I win on 6 of them. On the winning trades I make at least 3 times what I make on the losing trades so my reward to risk is 3 to 1. For example on the winning trades I make \$1500 (3 times my loser) times 6 trades = \$8000. My net profit is \$6000 but I was only correct 60% of the time. On the losing trades I lose \$500 per trade times 4 trades = net loss \$2000. I use stop losses and defined profit targets and trade using a semi automated system to insure emotion doesn’t play a part in my decisions. That’s how the money management I use works and that’s how I can be sure I have a statistical edge.

Now when you trade futures where the inherent leverage is 10x, if I make sure my reward to risk is at least 5:1, I can lose on 7 trades (\$500 loss per trade) = \$3500 loss and then on the 3 winning trades I make \$2500 per trade, which equals \$7,500 profit and therefore results in \$4000 net profit. I make money even though I am only right 30% of the time. All it takes is identifying one little pattern that repeats itself. That’s all you need to make money consistently in the market. There’s no holy grail in trading like people are looking for with some magical trading system that wins 100% of the time but trading on stock tips, message board postings, or out of the gut is just foolish.

## The market Is 100% Random?

From my experience the market isn’t random. It is made up of the buying and selling decisions of people which all look at the same data either fundamental or technical, and now in current years computers (HFT) market making systems, which are programmed with specific patterns. Yes there are factors which are random and a trader has no control over, such as whether a company will miss earnings or when a buyout will be announced. Nobody can predict this without insider trading which obviously isn’t a part of a real trading system accept for maybe crooked hedge funds like SAC Capital. That is coin flip odds when you are involved in that sort of thing. The only way to factor these in is to avoid trading the actually earnings release and shortening holding periods.