Trading is a probability game. Seeing an edge in your favor increases the probability of a profitable trade. Acting on that edge without reservation is a character trait of successful trading.
Trading is not gambling like a casino game unless you treat it like one. The probability of success in roulette long term is near zero. Card counters in blackjack can gain a competitive advantage by knowing when the cards are in their favor. Once the probability/edge is in their favor, the bet size increases. Could they be wrong? Of course, they can. Anything can happen.
The late Mark Douglas, author of Trading in the Zone listed five characteristics of a probability market mindset for traders. Number one is anything can happen. Getting comfortable with that alone can be exciting and frightening.
- Anything can happen.
- I don’t need to know what is going to happen next in order to make money.
- There is a random distribution between wins and losses for any given set of variables that define an edge.
- An edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.
I review the above list nearly every trading day by memory. I have been looking at it and writing it out for years now.
You don’t really need to KNOW what will happen next to make a profit in the long term. That’s because there is a random distribution of winners and losers given every set of variables that define your edge. Sometimes you will be wrong, but the odds are in your favor. Not having to know is a real relief once you understand the game of trading.
The edge you have uncovered in the market is nothing more than an indication of a higher probability of one thing happening over another. Perhaps you see a greater probability of a stock rising than either falling or staying flat. Your edge can be from technical or fundamental analysis learned from experience. You only need to learn a few solid edges to get profitable long term.
The variability in the markets is so vast that every moment in the market is unique. There will by default never be another trading day like today. The uniqueness is what makes us return to the first axiom of a probability mindset, anything can happen.
Continual improvement is one of the joys of life. Learning the core axioms and ingraining them into your belief set will make trading more rewarding and much less stressful. And when you are more relaxed you perceive the markets as they really are, not as you wish they would be. And that is where the profits are!
Enuf said.