This is a guest post by PattensWizard on Twitter.
“No one can predict the market consistently. It is all about odds, statistics, probabilities, and avoiding the risk of ruin.” – Henri Simoes
I believe this popular quote from Henri Simoes sums up trading in the best possible way. In life, trading and everything else, if there is something you can be sure of, it is that nothing is 100% certain. That’s definitely why I love this quote.
It perfectly encapsulates the saying that trading is an odds game and a game of probabilities. The arena of trading and investing is full of surprises and uncertainties. Without being random, almost anything can happen in the trading sphere. Therefore, traders should always prepare their minds accordingly. They need to understand that trading is all about odds and probabilities. In order to be successful, you have to bend luck for it to be on your side.
I vividly remember the first time I looked at a price chart. It was crazy!
Prices went up and down. Green, red. Profit, loss. It felt so random.
What can explain these (sometimes sharp) moves?
When I started trading, I knew that learning and training were important. I spent a lot of time learning skills and training. I learned to read and analyze charts. I learned technical and fundamental analysis in order to increase the chances of my success. I used to doubt myself, my system, and my strategy whenever I made losing trades. I used to think about improving and getting better. I would look for new books, new content, and new courses to learn more secrets of success. I would spend weeks figuring out what went wrong and making changes to my system and strategies. I would stress out because I didn’t know what would happen next. And guess what, nothing changed.
Until one day I understood.
Why stress out about every trade because in the end, anything can happen?
If anything can happen, why worry?
Just plan for the worse, set the odds in your favor and ride the waves, consistently.
Embracing this more probabilistic view was quite liberating. I didn’t need to always be right anymore, I just needed to be “right enough” (meaning making enough money) often enough. That’s why I created PatternsWizard.com, to share my passion about trading statistics. New traders unfortunately often focus too much on learning, frequently change their strategies, and never refine one strategy. They think that losing trades indicates that something is wrong with their strategies and they need to fix it. Sure! Losing is not fun but believe me, you will never have success unless and until you embrace the fact that trading is an odds game. Losing is part of the process and likely is part of your system. You can increase the odds of winning with learning and experience but nothing guarantees 100% success. Why? Because no one on this earth can claim where the market is going and what it will do next. What we can only do is guess. Our guesses can be informed and educated but still, a guess is a guess and it can prove right as well as wrong.
Trading can be summarized into 2 things :
How often do you “win”?
How big do you win compared to how much you risk?
For example, if every time you are right you earn 10 for every 1 you risk, you could be right only 20% of the time (even down to 10%) and still make money on average.
That’s the “on average” that makes it all work.
Find a system, make sure it’s statistically on your side and follow it.
Trading is an odds game.
That means you could see trading as a casino. Except here, you want to be the casino, not the gambler. Casinos always keep odds in their favor. They know that only a few percent of lucky people will win and the rest of them are definitely going to lose. They don’t know which one will win but they know on average they (as a predictable business) will be net winners. So, casinos are always going to be profitable as net profit increases as most people lose and only a few lucky ones win. If on average they win for every hand played, they just have to focus on having more hands played. Similarly, you also need to increase the odds of success and be in net profit over the long run.
Don’t try to always be right.
Just do like the casino, be right on average.
Then play your edge often enough.
Another point to be noted is, casinos stick to their system knowing that they will be in profit over the long run. They let a few lucky ones win. Similarly, you also need to stick with your strategy and system. You can tweak a little bit over time but don’t experiment too much.
Do you have a system? Do you trust this system?
To sum it up, be disciplined, don’t worry about losses, stick to your plans and strategies, and try to be in net profit just like casinos.
Never forget the fact that trading is an odds game and you have to turn odds in your favor.