Early in my trading journey I was lucky enough to have stumbled upon one of the great trading minds of all – this itself is a feat worth noting as many new traders out there fall for and got lost in the plethora of trading books, courses and the worse one of all, trading forums. This discovery helped shaped my mindset and my understanding of the psychology of trading before it could be “polluted” by others.
One of the most important lesson I learnt is this idea known as the Paradox of Trading – The paradox being, how can someone produce consistent results from an events that has an uncertain probabilistic outcome? This is an idea that most people who are new to the trading world fail grasp and leads to, I would say 85% of their trading frustration and eventual capitulation. Mind you, this is an idea that is just not confined in the trading world only, in fact it is also employed, most profitably in casinos around the world.
What new aspiring traders should first understand is a particular nature of probability that each individual event is statistically independent of every other events. In other words each trading setup or opportunity will not be affected by past setups or affect futures setups – Each setup has a random outcome. However once we understand that, we can use it to our advantage and similarly how casinos use it to their advantage. If you can get the odds in your favour and there is a large enough sample size of events, events that produces random outcomes can produce consistent results.
What beginners tend to do is that they put too much expectation (or hope sometimes!) on a single trade that will make them their millions and this is exactly the kind of mindset that will make your trading journey a living hell – we have to learnt that there is no such thing as a sure trade, no matter how good the setup is. However I don’t blame them for thinking that way, thinking in probabilities is hard, our “Hunter gatherer 1.0” brain is not used to believing two contradictory beliefs. On one level we have to believe in the uncertainty and unpredictability of the outcome of each individual event yet on the other we have to believe that the outcome over a series of events is relatively certain and predictable. This is the Paradox of Trading.
Dedicated to one of the greatest trading minds of all - Mark Douglas
May you rest in peace.