This one trading pattern transformed my trading and helped me become one of the best traders in the world. I call it the right side of the V and this concept, which is found all throughout the market, helps me risk less while making way more. I'm Lance Breitstein, mentor to seven and eight figure [music] P&L per year traders, market wizard, and I had multiple trading years where I made over $10 million in P&L thanks to the right side of the V.
So lock in and here we go. In its broadest form, the right side of the V concept helps traders understand that the same price does not always equal the same expected value. This is one of the biggest trader fallacies of all time.
A lot of traders assume same price, same result. They see the same number pop up later and think it's the same play. It is not.
The pattern and timing change the expected value. This actually has massive implications for how you trade and approach stock moves. One of the most important is for mean reversion strategies and the decision to fight the trend versus waiting for the turn.
As always, I'm going to rely on a trusted poker analogy to simplify this concept for you. How can the same price have different expected values at different moments in time? Really, it's the same way that win percentages can change for poker hands as the hand progresses.
Have you ever seen poker on ESPN? Somebody starts with a hand that's got maybe a 40% chance of winning. Then, as the flop, turn, and river play out, that same hand can climb to 80% or even 100% chance of winning.
Or vice versa, a great hand can become absolutely awful expected value as the play progresses. Trading is no different. The odds and expected value are constantly changing bar by bar as the trade develops and more information is gained.
When we take that concept and apply it, this is going to have big implications. And my next video is all about expected value. So make sure to subscribe and keep those notifications on so you don't miss it.
Let's talk about what I call the left side of the V or a stock that's trending lower and still has not turned yet. Now for some assumptions. Let's assume that if this example stock bounces and goes back to its normal price, you might be able to make 50 cents.
But your risk, we're going to give 50 cents as well. That is actually even being generous because the reality is, when you're fighting the trend, you don't necessarily have a stop and that's one of the most dangerous parts. We're just going to assume your win rate is 55%, loss rate is 45%.
So this does have a very small marginal chance of winning and positive expected value in this case just based on these assumptions. But we're really going to hammer down what happens when you get the same price after the turn. Once you wait for what I call the right side of the V, once the turn is in, two key changes occur at point B.
First of all, now we have a true stop rather than just something arbitrary or uncaptured risk because we're going to give it to the lows of the day. The other most important part is that our win rate improves because we're now going with that counter trend as it bounces. Even if we assume it is the same reward to risk, but that our probability of winning is significantly higher, we end up with much better expected value.
You always need to do the expected value math. It is so, so important. What you find in practical application is that a meaningful improvement in win rate results in an expected value that can be way, way higher.
That change in win rate resulted in an expected value that is four times higher. That is not a marginal change. That can be the difference between a career and failure.
Taking that one step further in terms of bet sizing, the higher the expected value, the more size you can put on the trade. Just like in poker, the higher the expected value, generally, the more you want to bet. You must have tremendous confidence.
Tremendous confidence. If you were an experienced trader, that logic is no different. That's why waiting for the turn allowed me to size up, to risk less, and stress less while making more P&L.
I know many of you are asking how do you define the turn? This is always going to be individualistic depending on your system and I'll be diving into this topic in another video. So be sure to subscribe, but here are a few ideas that I find tend to work well when stocks are capitulating sharply lower.
One entry I might use is the break of prior bar highs. Another entry is if we're holding a really tight downtrend, I might wait for that break of it. Or if it's a kind of bigger trend and a looser trend, I might wait for that break of a moving average as another possible entry.
And as always, yes, this concept can be applied at the same logic to up moves. So you would just flip it right at the break of prior bar lows, the break of an uptrend, or the break of a moving average going the other way. It's all the same stuff here.
The concepts always apply in either direction. The other area where I think people always miss on this concept in relation to capitulations is, "Isn't that death by a thousand paper cuts? " If you apply this everywhere and take every little turn, this is where the person is often not being nuanced enough.
What one needs to be doing, as with any strategy, is only apply it to in-play stocks that are making the most extreme and best of setups. I want to find the stocks that are making the biggest moves, the biggest panics, the multiple legs lower. Those nuances give a play edge versus others.
The quick answer is if you're finding yourself always dying by a thousand cuts, you're not being selective enough in the trades you're taking. If it were as simple as buying the right side of any ticker under any situation, trading would be easy, wouldn't it? Now let's apply this concept even more broadly because I think most people miss that this concept doesn't just apply to V-shaped patterns, but it applies to all of trading.
Regardless of the pattern, just because price is the same at different moments, expected value is not necessarily the same. Let's apply this to breakouts. If a stock is holding tight against resistance, then we break out at point A.
We might have a really, really great probability of breaking out and carrying on further. But now let's say this stock attempts to break out and we pull back into point B. So often, based on my data collection, I found that at point B, once the stock has failed to go and gain distance and that it's pulled all the way back to that prior resistance level, I actually find that the risk reward and the expected value on that are worse.
So yes, you get a second chance to buy, but there are a lot of times when I might not want to. Or let's say we barely bounce off that prior resistance and then we find ourselves in point C. Now we're making lower highs.
Twice now we can't push off that level. And so, so many people think to themselves, "Oh, nice. It's giving me another chance to buy or add and I can get the same expected value here.
" That's just not true. C, in my mind, is even worse than point B. B is even worse than point A.
That doesn't mean I won't ever play B and C, but I certainly, if possible, want to get all my size at A and have certainly less size at B and even less size or none at C. It's so important to recognize that even though it's the same price here, the expected value is not the same, right? Another really common example is breaking news where the same price is again not the same expected value.
Let's say some big headline comes out and you can buy it very, very quickly at point A. If that headline then starts to really deeply pull back and you see your prices again, so many people that might have missed it in point A, psychologically due to FOMO, think, "Oh, wow. I can buy it again.
" Then, much to their surprise, they so often get run over. It's important to analyze and think about this. Really good headlines and really good trades, they go on your favor.
They do not pull back. If they pull back, it's really shallow and it's always making higher highs and higher lows. So something's pulling back to that same unaffected price or pulling back deeply, I'm not saying it won't ever work, but you need to recognize that the odds of success in point B are not the same as they are in point A.
Often, something that's having some deep pullback, the risk reward isn't as good either on top of the probability spectrum of outcomes being worse. I have a video focused on how to trade the news and big headlines. So check it out after this.
That's why it's so important to recognize the givens have changed. A is not the same as B, right? A is buying a breaking news headline on something you think is very bullish.
B is that same headline has now pulled back and the market's not as excited as your expectations. That is critical information. Just like it's in the poker hand when the cards that you might have wanted have not appeared.
This is a fairly complex concept and some concepts take time to internalize, but it has huge implications and takes a lot of thought to think about and reflect on in your own trading. If you're not sure how to apply it, rewatch the video and leave a comment. Do some thinking and take your time.
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