Trading is a Game of Probabilities

man in blue suit

Yes, Trading is a game of probabilities and nothing else. Trading success often depends far more on the trader’s performance and less on the trader’s trading strategy, system or indicators.

The Tails Trading System

Imagine we’re flipping a coin. Heads I win one dollar – tails you win one dollar. Simple. Heads and tails will each come up half the time, and we’ll both neither win nor lose. However, unknown to me, you have a loaded coin. For every 100 throws, heads come up 49 times, and tails come up 51 times.

You now have a license to print money. Let’s call it the “Tails Trading System”.

All you have to do is sit back and bet on tails forever. Eventually, you’d win all my money (and anyone else’s who took you on).

All any trading system gives you is an “edge”. A favourable bias. Something that is more likely to happen than not.

Whatever trading system you use…

e.g. -pattern breakouts, trend-following, Fibonacci, moving averages, channel following, oscillator signals, Bollinger bands, swing trading, opening gaps… you are relying on a positive bias. Essentially, the trading system is saying “when ‘x’ happens… ‘y’ usually follows”.

Sometimes it doesn’t. Most of the time it does. And all your trading system does is help you identify high-probability trades, enter them correctly, and protect yourself while allowing your profits to grow.

Now some trading systems are better than others. But don’t get caught up on the search for the perfect system…

You know, the trader’s Nirvana… the elusive “Holy Grail”… the system that delivers profits on demand and never, ever gets it wrong.

Find a trading system that you like, one you feel comfortable with, the one that you understand. Then stick with it. Be consistent.

A cool, disciplined, trader will take an average system and make money with it. A nervous, arbitrary trader will take a brilliant system and wreck it.

Anonymous

All traders have “good” days and “bad” days. All trading systems have good or bad days/weeks or even months.

Some days you’ll make small profits. On other days you’ll make small losses. And once or twice a month, on average, you’ll make big profits. That’s how you make money as a trader. It’s not 9 till 5.

Problem is, you never know when the big trades are due to arrive. Like our “Tails Trading System” above, the one time you don’t take the trade is exactly the time the market takes off and never looks back.

You MUST see the big picture. Realize that the current trade is only one of many. On that basis, the current trade hardly matters. It’s like a piece of plankton in a very large ocean.

Trading is all about managing risk and then surrendering yourself to the oldest law in the Universe:

The ancient law of probability. “Trading is nothing but a pattern recognition numbers game”.

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