The Probabilistic Nature of Trading
In trading, you have to think in probabilities.
I was having a conversation with my mentor, and he was talking about the probabilities in trading, and I just thought to share this with you.
Online trading is a very interesting business, capable of making you good extra income but there are certain principles that you must understand and adopt if you really want to be successful at trading.
Just so you know, trading is about numbers.
It is all in the probabilities.
You cannot know the definite outcome of any trade.
Every trade you take can either end in profit or in loss, in some cases, you could also breakeven but then it has to be one of the 3 outcomes.
Your approach to trading determines which of the 3 outcomes has the highest probability of occurring but you must account for all 3.
This doesn’t mean that trading is difficult, not profitable or that it is gambling, it just guides you better on how to approach it.
The High-Performing Trading System
Your trading system or strategy, no matter the name or the principle it is based on cannot work all the time. What you can have is a high-performing trading system but to get that, you must follow the proper trading process.
We can summarize the trading process into 3 steps:
Conduct your research and analysis to find out what is driving asset prices and what direction they are likely to move.
Use your technical tools and strategies to find high probability entry and exit prices.
Take the trade, manage your risk, and manage the trade.
Let’s say for example, you have a trading system that after testing, you can conclude it has a 70%-win rate.
This means that if you take 100 trades, 70 should end in profit while you could lose 30, which is fine.
The problem is that these outcomes are totally random. The profitable trades could come first, the losing trades could come first, or they could be scattered in the middle.
You really don’t know which outcome you would get for any trade, and that is why you should stick strictly to the process and manage your risk consistently till you have covered the sample size.
That your first 5 trades were losses, doesn’t make the system wrong, you still have 95 to go - you are right on track.
Although, it becomes extremely difficult to trade consistently through the sample size if you don’t understand what you are doing, manage your risk or have patience.
If you don’t know what you are doing, you cannot even say you have a solid system.
If you don’t manage your risk, you would end up losing much more than you can afford, your account won’t even last to complete the sample size.
Lack of patience and emotional control makes the whole process even tougher, and you will end up jumping from one system to another.
It is all in the numbers, they always tell the story, you just have to be patient and survive long enough to reap the benefits.
Do the following and you will be fine.
Understand why prices move up and down -Fundamentals and Sentiment Analysis
Have a definite strategy and stick to it -Technical Analysis
Manage your risk with appropriate volume -Risk Management
Have patience -Emotional Control.
The greatest skill you can have in trading is patience - the ability to sit on your hands and wait till you see what you are looking for.