August 25, 2014

Quote of the day

There is a random distribution between wins and losses for any given set of variables that defines an edge.

In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 4 will be winners and 12 will be losers.

What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades.

This truth makes trading a probability or numbers game.

When you really believe that trading is simply a probability game, concepts like “right” and “wrong” or “win” and “lose” no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.

Mark Douglas

Explanation: a trading system may generate 4 winning trades and 12 losing trades. You will never know in what order this will happen and how much you will earn in the winning trade. For eg., you can have 12 consecutive loss making trades followed by 4 winning trades. Further, the winning trade may generate different profits and profit from one trade may cover losses of all previous trades.

You can always define your loss in advance and exit if a trade goes wrong.

No matter what system you follow you will never know with certainty, the number of winning or losing trades which will happen, the order in which this can occur and the extent of profits in any trade.

Because of this, trading is a game of probabilities. Once you realize this, you will not be attached to any trade or its outcome.

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