(I posted this on Reddit, but thought it might be something our members here would enjoy and maybe get something out of, so Iām reposting here.)
Play a game with me! Itās a game of probabilities, a game of chance. Maybe youāve heard of it? Itās called roulette. But our game is going to be special.
Our roulette is special because it has no green spots, no chance for the house to have an advantage. Thereās only red and black. But wait! Thereās more! It also has more black spots than red. Itās got 60 black spots and only 40 red spots!
Man, I like those odds. Black is looking mighty sexy! Whatās more, black and red both have the same payout, one to one!!!
Alright, letās play. Iāll be the house, you be the suckeeeeeerrrrā¦ I mean player! I said player!
So, Red or black?
Seems obvious, right?
Black.
Itās a win!
So whatās your next bet? Red or black?
Well, obviously black, right?
Another win!
And now? Do we change our bet to Red now?
No!!! Of course not! Why would we bet on Red? Itās only a 40% chance! Weāre back on Black baby!!!
Spin and ā¦ lose.
What?!?! What went wrong? How could this happen? Our analysis was perfect. We looked at each square, we counted each one, we did the math, we weighed the ball, we checked under the table to make sure there were no magnetsā¦ we did everything we were supposed to do before we took that bet! How could we possibly have lost?
What do we do now? Maybe we should try a new strategyā¦ a new way to analyze and better predict the outcome. Or maybe we should only bet on Black two times in a row, then Red for one round, then back to Black? Maybe if we add a new tool to help us predict the outcome better, maybe a protractor or micrometer?
So, what did you do wrong on that last bet when it landed on Red? Do you know?
I do.
You did nothing wrong. Nothing at all. And put into this simple gaming format it seems so stupid to even question what went wrong. Itās so obvious. Even though we have a 60% chance to win on Black, we have a 40% chance to lose.
So how should we handle this loss? Again, itās obvious. Pretend it never happened, trust our system and keep betting on Black!
So why is this probabilities thing so hard in trading? We have our system, we know our probabilities, yet we canāt accept the possibility our trade might lose, even though itās right there in the numbers! So we blame ourselves, our system, our brokerā¦.
STOP IT!
If youāve got your system and youāve proven to yourself it has an edge, there are two possible outcomes, the probabilities of each already known.
Winning tradeā¦ our analysis was correct.
Losing tradeā¦ our analysis was CORRECT.
No, thatās not a typo. A losing trade CAN be the correct trade. All successful traders have losing trades that were the correct trade. Because they know each trade is only a probability and they followed their system.
If you follow your system, each trade IS the correct trade, even the so-called ālosersā.
Individual trades do NOT matter.
Law of averages is what makes money, not individual trades.