Why trading is a probability game? As a trader, you have got to ignore finding a quality. you need to accept the actual fact that the stock exchange can do anything at any time. If you’re not convinced, consider that there are countless traders trading for institutions, funds, investors, swing traders, scalpers, etc. all acting together in several time frames and using differing kinds of research.
Fact: Trading isn’t about guessing the longer term because it can’t be done. It is just a probability game
If you accept this fact, then it’s much easier to require losses without destroying your self-esteem. you are taking a trade; you accept that you simply don’t know what is going to happen next. you have got no expectations that this trade will change into a winner. Your only expectation is that something will happen.
So how does one make money not knowing what is going to happen next? You treat trading as a probability game. Here is an example of a probability game:
Let’s say I roll a dice:
– I pay $1 when I play
– If I roll a 3, a 4, a 5, or a 6 then I win $2. If I roll a 1 or a 2 then I don’t win anything.
Clearly, whenever I roll the dice I’ve got no idea what the end result are. But i do know that for each roll the percentages are in my favor. within the future, I’ll win 4 times out of 6, which implies that i will be able to pay $6 to win $8. I’ll be a standardized winner if I play long enough.
In mathematical terms, your expected win anytime you play is
(4/6) X $2 = $1.33 meaning $0.33 profit (you pay $1 to play)
Another version of this game can be that you just win $3 if you roll a 4, a 5, or a 6, and zilch if you roll a 1, a 2, or a 3. during this case the expectation when you play would be
(3/6) X $3 = $1.50 meaning $0.50 profit within the future
So how will we translate this into trading?
Each time you roll the dice, you don’t know the end result, the identical as for every individual trade. But on every occasion, you roll the dice, you recognize the chances are in your value more highly to make money, and you may make money if you play long enough.
So, for every trade you enter, you need to know that the chances are in your like better to make money. As you’ll see within the second example, it doesn’t mean that you just need to win more often that you simply lose. It also depends on what quantity you win after you win and the way much you lose once you lose.
How does you put the Probability game in your favor?
You have to develop a trading edge using technical analysis, fundamental analysis, market internals, etc. you have got to own variety of variables that has to be present before you enter a trade and always use the identical set of variables. Your edge is your probability strategy to enter and exit trades and will be defined in your trading plan.
All that may be summarized as follows:
– for every trade you are taking, you don’t know the end result, you accept that anything can happen, and thus you’ve got no expectation for that trade.
– you suspect in your trading strategy, that’s you think that for every trade you are taking the percentages are in your favor.
– you think that the end result over a series of trades is comparatively certain and predictable.
To go back to the dice example: will you get mad or feel stupid after you don’t roll a winning number? No because with a dice you accept the very fact that you just cannot know the end result. you’ve got no expectation. Apply the identical idea to your trades and save your self-esteem.
This idea of treating trading as a probability game made an enormous difference within the way I feel about losses. I learned about it in “Trading within the Zone” by Mark Douglas. I strongly recommend this book.
If you have got an honest trading plan, with a technique to enter and exit trades, then a successful trade is one that you followed your plan, not necessarily a winning trade.
And remember, you may never know if your strategy works if you don’t follow it.