Every trader knows trading is a probability game. However, very few can internalize and live by the true meaning of what it means to be a probability game.
Mark Douglas, the author of “Trading in the Zone”, explains it well. Someone who masters the probability game produces uncertain outcome but consistent result. The best example to illustrate this concept is the casino business. The casino holds on the average 4.5% probability advantage over the player. It does not know whether the next hand will be a winner or a loser against the player, but the casino is certain that they always win given enough bets. Therefore casinos do not care if a player is going through a winning streak, as long as he is not cheating.
That’s exactly how traders need to think about his trades. Market is random. Anything can happen to the current trade. A trader can increase his probability of winning either through fundamental or technical analysis but the best analysis can never produce a 100% certainty. In reality, the highest win rate that the best analysis can produce is far from 100%. However, as long as the trader has a trading plan that can produce positive expected value, he can expect consistent result over a reasonably large number of trades, just like the casino.
The crucial point here is – “Positive Expected Value”. Gamblers have to depend on luck to win because the game is designed with negative expected value for the players. When enough time and bets are wagered, there is no such thing as luck. Probability always wins.
Trader must start with a trading plan with positive expected value that has been proven by back testing and long period of time of practice. The trader must have confidence that he can execute his plan. As long as the trader can continue to execute his plan over and over again, he will deliver consistent positive results.
The mentality of the successful trader is also very different from the average. He has no emotional attachment to each individual trader. He has nothing to prove whether he is right or wrong about the trade. He knows each trade is random. Although there is no way that he knows if the current trade will come out to be a winner or loser, he is confident after doing the same thing enough times, he will be a winner.
This concept has done wonders to my own trading. Trading suddenly becomes much less stressful. I just do what I’m supposed to do and let the market decide whether it will be a winner or a loser. When it turns out to be a loser, let it be. I know that over the long run, I’ll be alright.
The focus is to execute my trades according to my trading plan. Whenever I violate that, I give myself a yellow card. In the past, I gave myself at least one yellow card in a month. Now that is dropped to 1 yellow card every 3 months. That’s a great improvement and my trading results have proven the power of this concept.