Thursday, April 23, 2015

Understand The Truth

Trading is a game of probabilities.
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 comes up 49 times,
and tails comes 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 favorable bias. Something that is more likely to
happen than not.
Whatever trading system you use...
... 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 then 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
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. One 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.
All traders have "good" days and "bad" days. Some days you'll make small profits. 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 traders. 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
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


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