**5 Mental Models to Think Like a Trading Genius โ€” Transcript & Summary | SozAI** Source: https://sozai.app/transcript/mental-models-think-trading-genius/ Learn 5 mental models to trade like a quant, focusing on edge, risk management, and survival to achieve consistent prop firm payouts. ## Key Takeaways - Think like a quant: focus on edge and expectancy, not on predicting market direction. - Accept losing trades as part of the process; survival of the account is crucial. - Proper trade sizing and risk management tailored to prop firm rules maximize long-term profitability. - Taking multiple trades with a small edge can yield better returns than waiting for perfect setups. - Review and audit trades regularly to improve strategy and reduce losing trades. ## What the video covers - JJ Simon shares his experience of earning over $1.6 million in prop firm payouts by thinking like a quant instead of a traditional trader. - He emphasizes that success is not about predicting the market but about having a slight positive expectancy and letting numbers work over time. - A key mental model is accepting a win rate below 50%, focusing instead on risk-reward ratios and trade sizing to maintain a positive edge. - Taking multiple trades with a small edge can outperform taking fewer trades with a higher edge in prop firm environments. - Traders should stop focusing on individual trade outcomes and instead focus on long-term edge, proper sizing, and tested strategies. - Survival of the trading account is prioritized over chasing profits, as losing the account means losing all expected value. - Risk management must be adapted based on the number of accounts and the likelihood of losing streaks to avoid blowing accounts. - The mindset of the house in a casino is recommended: accept losses as part of the process and rely on statistical edges over many trades. - The importance of auditing past trades to remove losing trades and improve win rate incrementally is highlighted. - JJ Simon stresses that trading is risky and shares these models as what worked for him, not as financial advice. ## Chapters 1. 00:00 Introduction and proof of prop firm payouts 2. 00:36 Understanding expected win rate and risk-reward 3. 01:13 Sizing trades for prop firm environments 4. 01:55 Shifting focus from individual trades to long-term edge 5. 02:29 Thinking like the house: statistical edge and sample size 6. 03:03 Probability of losing streaks and trade sizing 7. 03:34 Importance of account survival over profits 8. 04:06 Managing losing streaks and risk across multiple accounts 9. 05:01 Trade auditing and removing losing trades 10. 05:36 Closing thoughts and disclaimer Answers ## Questions about this video What is the main difference between thinking like a trader and thinking like a quant? Thinking like a quant focuses on having a slight positive expectancy and letting the numbers play out over many trades, rather than trying to predict market direction or be right on every trade. Why is a win rate below 50% still profitable according to JJ Simon? Because JJ uses trades with a risk-reward ratio of 1.5, a win rate of about 42% is above the break-even rate of 40%, allowing for profitability over time. How does JJ Simon recommend managing risk in prop firm trading? He advises sizing trades so that no single losing streak can blow the account, adjusting risk management based on the number of accounts, and focusing on survival to allow the edge to play out. ## Full Transcript โ€” Download SRT & Markdown 00:00 Speaker A I've done more than 1.6 million dollars worth of prop firm payouts, and I'm going to show you the proof because everybody in this space talks and almost nobody shows. Now, here's the part that's going to annoy some of you. None 00:08 Speaker A of that came from predicting the markets. I'm actually wrong constantly. What made the difference was thinking like a quant instead of thinking like a trader. Now, that really comes down to just five models. Get these five and you 00:17 Speaker A stop treating every trade like a gamble, and you start acting [music] like the house. Here's the first one. Most people trade to be right, and honestly, I did too when I first started. Everyone wants to top tick, bottom tick, and have a 00:26 Speaker A 100% win rate. That's just unrealistic, and that mindset is what blows accounts. A quant trader doesn't predict the market every single time. They understand they have a slight positive expectancy with every trade they play. 00:36 Speaker A They know their expected win rate, average risk reward over time, and they just let the numbers play themselves into their favor over the long run. 00:41 Speaker A Being wrong is literally built into the plan. It's not proof that the plan is broken, though. So, the real win rate that I have is about 42%, and that is on a 1.5 risk to reward trade. The break-even rate on 1.5 R trades is 40%. 00:53 Speaker A So, I am 2% above break-even, which doesn't seem like a lot. There's definitely people online that claim they win at more than 50%, but just go to AI, ask it if I win 50% of my 1.5 R trades 01:03 Speaker A and start with X, how much will I have by the end of the year, and it's going to tell you an extremely large number because 50% with 1.5 R is statistically impossible with a large enough sample size. So, I have about a 42% win rate, 01:13 Speaker A and the reason why I've been able to do 1.6 million dollars worth of prop firm payouts with only a [music] 2% above the break-even edge is that I have sized it perfectly for the prop firm specific environments. So, there is one world in 01:23 Speaker A which I take 10 trades a day with a 2% edge. There's also a world in which I only take one trade a day, which most strategies take one trade a day. Like it's not a bad thing per se, but you might only 01:32 Speaker A have one A++ setup per day. I could definitely find 10 A setups or 10 lower quality setups that are still with my bias and still generating positive expectancy, which is that 2% edge right there. So, if I take one trade a day 01:44 Speaker A with that 5% edge, I'm essentially gaining about 5%. [music] If I'm taking 10 with 2%, then I'm getting 20%. So, taking more trades per day if you have an edge is definitely what you should be doing on the prop firm [music] specific 01:55 Speaker A environment, and it's how I've been able to get all the passive I have existing within said environment. So, before every trade, stop thinking, is it going to go up? Is the trade going to play out in my favor? Stop focusing so much on 02:05 Speaker A the individual trade, and focus more on, do I have the right sizing here? Do I have a tested edge? Is this going to play out in my favor in the long run? 02:12 Speaker A Then, once you stop trying to be right, the next one is going to tell you how much each trade should mean to you. And it's not going to be too much. Imagine you're at a casino. The house is not 02:19 Speaker A going to sweat one blackjack hand just because they know the edge is in their favor, and it's going to play out in the extreme long run. So heavily in the casino's favor. That is what you want to become as a trader. You want to become 02:29 Speaker A the house. You want to have an edge in your favor. Then, you'll know every single trade you place, as long as you follow your system, is going to be replicating that edge. Now, you just need as much sample size as physically 02:38 Speaker A possible to realize the edge. Every gambler at the casino reacts based on what they're feeling and based on what they're seeing. But, the house doesn't. 02:44 Speaker A All they do is keep dealing. [music] Same with the market. Math only shows up over a significant amount of volume, never in a single hand or a single trade. You should judge yourself at least on the last 100 trades, if not 02:53 Speaker A more, not just on the most recent one. Obviously, any strategy has its off days, and maybe there's a bad day where I'm taking 10 trades, but that doesn't mean I'm going to lose all 10 trades just because the strategy didn't play 03:03 Speaker A out. The chance of losing 10 trades, well, you could just solve for that yourself. If you have about a 42% win rate, then that means there's a 58% chance that you lose a trade, and you just put that to the power of 10 to see 03:12 Speaker A your chance of losing 10 trades. Obviously, it's a pretty small percentage, but once you have a huge amount of trades that you're looking through over multiple days, well, it becomes a lot more probable to have an outlying losing streak. Then, size your 03:23 Speaker A trade so that not one bad one is going to wreck the entire account, or the entire house in this case. So, that's how you should feel about one trade. 03:30 Speaker A Next is the one that decides if you're even in the game to collect, and it's the one that most traders don't run. 03:34 Speaker A Zero is permanent. As soon as you lose your account, there is no more upside involved in that account, obviously. 03:39 Speaker A [music] But, the difference between what a quant does and what a trader does is a trader is so focused on how much profit they can make in account, but a quant is more focused on how can I not lose this 03:48 Speaker A account? Because when the account is gone, you have zero expected value. So, basically, we do anything in our favor to make sure our account doesn't hit [music] zero. In the prop firm space, everybody is focused on how much money I 03:57 Speaker A can make, how many payouts can I get, and they're all just focused on making money, which it's not the worst thing to be thinking about. They're just thinking about it the wrong way. They're trying to make as much money as possible on 04:06 Speaker A their account. If you're on a live account, it's great to make as much money as possible because all that money is yours. But, on a prop firm, you're making a lot of money, maybe you're getting sent to a live account, maybe 04:13 Speaker A you're being limited, maybe you're being banned or restricted. So, instead, focus on making sure your account doesn't hit zero. Then, your return is going to be higher, your profitability is going to be more exponential because your accounts are surviving long enough that 04:23 Speaker A your edge can actually play out in your favor. Honestly, I think survival is way more important than winning, and that's how I got to $1.6 million worth of prop firm payouts. I still have a lot of accounts that actually do hit the max 04:33 Speaker A drawdown, but as long as I'm optimizing for that specific constraint, then more often than not, they will not hit the max drawdown, and then I can experience that exponential growth and the edge that my strategy has in the prop firm 04:42 Speaker A markets. It is also totally normal to have losing streaks within a day if you are against the trend. For example, if I'm taking attempts at a reversal back towards the market open, as long as my risk management is perfected, meaning 04:54 Speaker A I'm not blowing the account at a higher rate than I am generating EV, well, it could totally be possible that I take three or maybe even four losses in a single day before I'm able to get the price to revert. [music] But, as soon as 05:06 Speaker A it starts reverting, in this case, off this break of structure, then you would be getting in with more and more positions on your way up. So, you have more exposure to the winning trades, less exposure to the losing trades, and 05:16 Speaker A you're fitting your risk management within the prop specific environment to optimize your expected value. So, there's a few things you can do, and it's honestly based on how many accounts you have. First, size it so that a losing streak doesn't blow your only 05:25 Speaker A account if you only have one account. Second, if you have five accounts, size it so one losing streak wouldn't blow all five of your accounts. So, your risk management, meaning your take profits and your stop losses, should vary a lot, 05:35 Speaker A honestly, based on how many accounts you're 05:43 Speaker A Once survival is handled, it's on to the next model, and it's one that most traders don't do because doesn't feel comfortable. And honestly, that's the gap for most people. Knowing you should think like the house is the easy part. 05:53 Speaker A Running it when there's real money on the screen and your account is in drawdown is a completely different thing. It's where nearly everybody falls apart, including me early on. So, the one thing I do directly with people is 06:01 Speaker A review every single trade they place and make sure they're following the math, not their gut. It's an application that I keep a small on purpose. If there's a link in the description and it's for you, go ahead and apply. If not, no 06:11 Speaker A worries. Stay with me because this next model is the one that took me the longest to trust. What most people do is they set themselves a bias and an entry criteria of long or short. And all they do is focus on reasons why that bias is 06:21 Speaker A correct. Nobody is focusing on reasons why that might be wrong. But, if you flip it, then you're going to be looking for reasons why a trade is wrong. And if you can't find any reasons, then that definitely seems like a good trade that 06:31 Speaker A you should be taking. Now, here's an example of a trade that looks like it would follow my strategy, but if you were paying attention to news, then you would have seen there was an unfair move that you should not be reverting. So, 06:39 Speaker A here was the market open. Here were the first two attempts at reversion, which were totally accurate attempts. And then, right here, there was this huge dump down, which was caused by news. You can also see because of the volume spike 06:49 Speaker A at a pretty random time in the day. Since this was caused by news, now the new fair price is being adjusted to down here. That is why I would not take longs off this break of structure all the way 06:59 Speaker A back up towards the open because I believe it would be at a new fair price. 07:02 Speaker A Since the news was unexpected, it's going to change fair price of the market. So, on every trade you take, ask yourself, "How am I wrong?" Instead of asking yourself, "Why is this right?" That one's going to save you from losing 07:11 Speaker A money on the trades you shouldn't have taken. The last idea is the same model taken all the way, and it's the most boring one in trading. You don't need a better strategy, you just need to remove as many losing trades as possible. Your 07:20 Speaker A losses are holding you down about 80% when your wins are bringing you up about 20%. So, if the losses are accounting for most of what's going wrong with your strategy and your trading, well, it makes a lot more sense to focus on 07:30 Speaker A minimizing the losses than increasing the small winners. Good setups are already good setups. They're already making you money. All you have to focus on next is reducing the amount of losing setups so you can reduce the amount of 07:39 Speaker A money that you lose over a large sample. Maybe a trade feels exciting, maybe you're having FOMO, greed, fear, anything like that. If you feel emotion coming into it, then most likely something is off with the trade and you 07:50 Speaker A shouldn't be taking it. Here's an example of how I was able to increase my win rate just a little bit recently. So, market open is a fair price. We have a huge unfair move down that I'm going to 07:58 Speaker A look to revert. We have a very weak break of structure here, which unfortunately was a loss. Then, there was a second break of structure, but if I was to take it, I mean, I would have lost because my stop loss is usually 08:09 Speaker A quite low on these break of structure trades. If I was to wait for the second break of structure after the first one fails, it's usually a better idea to wait for the second one. Then, that would have been a winning trade. So, 08:19 Speaker A cutting out some of the losers is always going to help increase your win rate if you can correctly identify those losers. 08:25 Speaker A So, you should audit your last 50 trades and look, why am I losing these trades? 08:29 Speaker A What is my worst performing setup? Why is it? And then remove it completely. So, those are the five models. You have to think in probability, you have to be the house, you have to protect against zero, you have to hunt for why you're 08:39 Speaker A wrong, and then win by the trades that you skip. Drill those into your head, and then the market is going to stop being something that you keep just trying to predict and something that you start outlasting. Now, I kept this video 08:47 Speaker A pretty theoretical and at the level that a quant thinks. If you want the actual mechanics, the exact way I test the setup, size it, and get out of it, that's what the mentorship program is for. Everything I just walked you 08:56 Speaker A through is what those mechanics actually look like once you understand why they work. And of course, none of this is financial advice. It's just what worked for me. Trading is a real risk, and most people that try it end up losing money. 09:04 Speaker A If you want to be on the winning side, and if there's a link in the description, then my mentorship program is open, and I would love to have you. 09:09 Speaker A So, apply and see if you're a good fit. If not, I'll see you in the next one. Topics: mental models quant trading prop firm trading risk management trade sizing expected value trading psychology win rate trading strategy JJ Simon --- This is the markdown twin of https://sozai.app/transcript/mental-models-think-trading-genius/ โ€” the same content, without the markup. 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