We are often asked how trading a defined risk spread can be profitable. When we collect 1/3 the width of the spread, we will only break even after commissions. Additionally if we manage our winners, we will not be profitable because we are realizing a smaller win and the same amount of losses. How can this be a profitable trading strategy?
Today, Tom Sosnoff and Tony Battista explain all of the math and why using this strategy works. One thing that must people don't account for is the higher win rate that we experience when managing winners. By increasing our wins, we limit losses and even though we are collecting a smaller amount we can still be profitable. Additionally, this assumes a full loss on all of the losers. If we only had a partial loss, the strategy would be even more profitable.