Thinking in probabilities

Beginner Questions Trading Psychology
7

Thank you for that.

I view probability in a different manner. I think probability is the most over looked factor in trading. But when I view a trade though the prism of probability I ask myself “what is the probability that this trade will work in my favour??” 50% 60% 70%??

There is no doubt that the market can go in any direction and a trader needs to be fluid in their thinking to adapte to changing markets. But once you have a bias of market direction, and lets face it you would not pull the trigger on a trade without some level of market direction bias, then the question of probability comes into play. What is the probability that this trade will be successful??

Losing in trading is just the cost of doing business. However you still need to be concerned about those loses and evaluate as to whether it was just a failed trade or whether it was you who did something wrong when you took the trade.

Cheers

Blackduck

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8

@Blackduck

I think we agree but just saying it differently. If you have done your backtesting, have a good idea of the metrics of a system then - ok I’m not literally assessing the probability each trade - but I have a map of how it’s likely to work over the course of so many trades.

That means I can sort of relax knowing the system takes care of itself.

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9

I think one of the biggest hurdles for a beginner is actually having trust in the approach they are using.

That can cause all sorts of problems - even if the system is net profitable

I know through experience what I do works - so it gives me the luxury of not worrying after a loss.

In fact I think for beginners the whole area of technical analysis is puzzling. How can a few squiggly lines on charts make you money - then comes the mistrust.

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10

I think sometimes you set the probabities yourself, through you mindset. You can have a successful system but still lose because you believe you will.
I have been trading for about a year and a half now. I have lost alot which is to be expected but as time goes on my strategy has been getting more and more refined which is what counts. So over the last few weeks I have had some success.
At the beginning of this week I began to get paranoid. I told myself that I have simply had a winning streak and that the probability is that it will come to an end. So it did.
Now I cannot help but think it was the way I began to think this week that caused the probabilities to shift against me. The minute I began thinking that the probability of losses is increasing because of the number of wins I have had I lost my ability to think unemotionally and objectively. I started watching the news alot more frequently to catch the slightest indication of changing market conditions and I began to overthink each trade.
So I think probability can sometimes be determined by your own state of mind

11

@thami442

First off everything I say is about mechanical systems. The moment we start using discretion we open a whole new can on worms.

What you are saying I think is your negative expectations are causing you to tweak, change or alter your strategy when in a trade?

Clearly if you mean your negative expectations are altering the outcome without you messing with your system - well that is in the realm of quantum physics something I’m not qualified to discuss.

Sometimes it sure feels like the markets are doing the opposite of what we want just to annoy us but I think that’s an illusion.

I think, despite you thinking you are thinking in probabilities you are clearly not.

Let’s say your system has a win rate of 65%. And you’ve just had ten wins in a row, well your system still has a win rate of 65% regardless of the streak.

Previous results do not affect the probability of the next result - something many of us forget

I’m too am as guilty of this when I have a string of loses recency bias starts me thinking I’ll have more.

This can lead to all sorts of tinkering with systems and takes us away from consistency.

When Im talking about thinking in probabilities what I mean is the acceptance that pretty much anything can happen on any one trade - but over a series of them the odds will work out in your favour.

This is discussed in Mark Douglas ‘Trading in the zone’ he talks about trading with a casino like edge.

That is the mentality we need - after a loser, or even winner it’s just ‘next’.

You talk about the news and how it affects your thinking

A big step for me in my trading was when I realised experts are clueless - my system knows best

Then I realised that despite my own opinions - my system knows best.

There are many times I think the market will do one thing, but my system tells me to do the opposite.

You have to get used to ignoring your own opinions - and just follow the system.

This isn’t a problem for me now because I’ve had so many experiences where I was wrong and the system right - but I admit it’s harder when new to trading.

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12

Hmmm that is a far more in depth discussion. You are correct in that I took a more general approach to the topic. I will try to consider this a little more deeply.
I have a system that I am becoming more and more confident in because it has increased my hit rate but it is too soon to tell so I suppose I am not really qualified to comment on that just yet.
What I will do however is watch the videos and the link and see if I can understand

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13

OK I am struggling with the links the videos are no longer available.

14

@thami442

I’m not quite sure what videos you are referring to, but if your confident with your system go for it - but do it with small amounts of money first.

The markets are always going to be there.

It took me 8 yrs before I became consistently profitable, so believe me there is no rush.

We have all been through the same thing in fact I would honestly say I was worst than most.

There are some great traders on here @anon46773462, @tommor, @Blackduck, @Lang15 to name but a few.

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15

It all comes down to placing trades when the odds of winning are greater than those of losing, in other words, tipping the balance in your favor.

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16

Yeah that’s not a bad way of looking at it.

:grinning:

Cheers

Blackduck

17

It remains only to find this optimal balance, and feel it in order to make good money.

18

I think you’re very fortunate if you can survive eight years of losses and still be able to put food on the table and keep a roof over your head. You must have had a ‘day job’ that not only fed you (and your family, if you even have one) but made up for all the money you lost in your unsuccessful trading. I only wish that everyone could be so lucky.

19

@dwamurray

Very fortunate and very stupid.

Fortunate to have had a windfall before trading and for landing into a good job whilst living in a cheaper country (geographical arbitrage lol)

But trading never came easy it was definetly the school of hard knocks approach for me.

20

In your beginning days did you back test everyday? And once you knew what worked did you back test once a week or so?

21

@leeb94

I would like to say I did everything the way it should have been done - but I didn’t

I did no backtesting for say the first two years of trading with real money.

I was a very foolish beginner.

22

Gee I must be the only one. I have never done backtesting ever. I consider it a waste of time. But each to their own.

Cheers

Blackduck

23

I was the same, do you still back test now

24

That’s not a bad psychological framework to adopt in trading.

25

Trading has to be learned by giving up a lot. Those who consistently profit by looking at their past will see that they have learned trading with a lot of difficulties. Their experience was not made in a day. These experiences come as a complete surprise to traders when they trade on probability. Who has been trading for so long still trades on probability? Yes, it is true depending on the Forex trading probability. Because no one knows what will happen in the market. You never know when the market will lose you. But if the probability of trading is good, then your chance of making a profit is 90%.

26

The Forex market is a market of possibilities. A trader can make a loss even with a 95% accurate analysis. We trade possibilities all the time. However, the trader who manages the discipline and trades is able to cover the loss even if he loses. One thing I always remember is that in order to make Forex market profit I must focus on money management and risk management.