In this week's Stansberry Investor Hour, Dan welcomes Steve Burns to the show. Steve is the founder of New Trader U, a blog with thousands of articles plus online courses.

Steve kicks things off by explaining how trading is math, detailing how its different components are formulaic. He says that understanding the "math" of expectancy for your returns can help you with managing your discipline, and knowing the risk-to-reward ratio for any trade is the first important step that every investor needs to take before they enter a trade. Steve notes that despite what many folks might believe, being right 50% of the time is pretty good. But even performing that well requires understanding the risks that your trades have...

It's good to taper your gains and losses to what you can mentally endure. It's going to be less than you think you can, especially with how big your capital is. Going into a 20% drawdown with multiple six figures is a lot different than going into a 20% drawdown with five figures. So you need to understand that. And math can help you understand the math of the drawdowns and the recovery time.

Next, Steve reflects on his early trading days, comparing his methodology and results then with his current strategies. Then he details one metric that determines profitability. It's the most important thing you need to be mindful of that will impact the profits your trades bring in, regardless of factors like win rates. And Steve analyzes the cons with modern trading that ease of entry has provided. Most individual investors don't realize these risks exist and stand poised to lose big...

The low barrier to entry provides the danger [of treating trading like gambling]... [The traders] bring in the gambling mentality... It's like the casino paradigm. The casino is a business model. They know the bet sizes they'll allow. They know what the edge is in all their games. They know they're going to win in the long term... And the traders come in with the gambler's paradigm, where they have the odds against them. They're randomly making gambles based on predictions and opinions, so they don't have an edge right out of the gate. And professionals will act like casinos and take their money.

Finally, Steve discusses how to create an edge in trading as an individual investor despite the overwhelming odds. He then explains "positive expectancy," a mathematical formula that shows your average losses versus your average wins. Knowing this can help you more properly filter out volatility, which traders should keep in mind when establishing their position sizes and stop losses. And Steve shares the green lights he looks for when entering a trade...

I'm looking for positive momentum. Whether that's a five-day, 20-day [exponential moving average] crossover, I found that to back test very well... But the key is that I have to have things in demand, if you want to be trading stuff like Nvidia or the semiconductor [exchange-traded funds] or Apple, you want to have things with built-in demand... You don't want to be buying junk off the bottom and things that have bad financials, because you want to find stocks that have good fundamentals. And then you could trade them using technicals. But you want solid fundamentals for what you trade.

Click on the image below to watch the video interview with Steve right now. For the audio version, click "Listen" above.

(Additional past episodes are located here.)

The transcript is coming soon.

This Week's Guest

Steve Burns is the founder of New Trader U. He started investing in 1993 and trading with his own accounts in 1995. After accumulating nearly 20 years of experience, he founded New Trader U in 2011 to help traders improve their psychology and profitability.

Steve is the author of numerous books, including Trading Is Math, Moving Averages 101: Incredible Signals That Will Make You Money in the Stock Market, and Buy Signals Sell Signals: Strategic Stock Market Entries and Exits. He has also contributed to Trader's Planet, Trader's Magazine, and See It Market.