You Will Win When You Know This One Thing!
Submitted: 04 Oct 11 15:41
 

I would like to shed light about understanding the concept of “Probability” in this newsletter.

The common impression of a trader is someone who makes decisions to take positions in the market with the aim to gain profit from the price movement. There is often something mystical about this winning trader that he somehow is able to see what others cannot.

The trader’s job scope is to execute a tested strategy whenever the trading signal appears. Simple isn’t it? 

Trading is simple. But it is not easy. The weakest link in the whole process is always the executor himself. Many new traders just cannot do what they are supposed to do when the chart tells them to enter a trade. Why so? 

Let’s look at the diagram below.

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The above shows the winner/loser “Probability” distribution of a 75% accurate trading strategy. The trade outcomes goes from the top row, left to right. What this trader will encounter is 2 winners followed by 5 straight losers. I can say for certain most new traders will not be able to follow through with the rest of the trades as the string of losses will make him second guess the strategy. If you look further, a string of winners (in green) awaits and he will be a very happy winner if he had continued doing what he was supposed to do. 

It is no wonder why most traders are able to make a lot of money when they are doing simulate trading. With no money at stake, they are able to carry out each trade without any psychological baggage. And once they move to LIVE trading, they usually cannot replicate the same performance. Once he encounter losses, he starts to get defensive and will cherry pick trades and tries to justify for his inconsistent actions. In trading, the more afraid you are to losses, the more losses you attract.

Even the most profitable trader has to face losses. But how he interprets the losses is the key to success and failure. Good traders look at profits in long term and do not let a few losses affect their composure, nor shake their trusts to their trading systems. They know that they tested it, they know that the strategy has served them well, and they stand firm.

Trading is about execution more than the ability to spot winners. So, trade well by fully understanding “Probability” and following a mechanical system of set rules and profit will definitely follow.