What you are about to read has the ability to change your stock trading results for the better. No. I am not going to share with you some kind of “secret” indicator or some guru’s prediction. What I am going to share with you is how to properly approach the trading game where rules and the proper mind-set can help propel the average trader to above average ranks. I am enlisting the help of Mark Douglas, who I believe has written one of the best books on the psychology of successful trading. In his book, Trading In the Zone, Douglas discusses how a trader can begin to eliminate the emotional risk of trading via a probabilistic mind-set. A probabilistic mind-set is essential to understanding the market because the market is “always communicating in probabilities.” In other words, the market does not speak Chinese, English, Russian, or bullish or bearish…it speaks probability. If we plan on living in China we need to learn Chinese, if Russia then Russian. If we plan on making a living in the market then we need to learn the language of probability. A probabilistic mind-set consists of internalizing the following fundamental truths:
1. Anything can happen. Or as I like to say, anything can happen…and often does. Usually the market does the exact opposite of what we think it should do and when we begin to doubt the market it does exactly what we once thought it should do. Get it?
2. You don’t need to know what is going to happen next in order to make money. Trading is not about being right in our arrogant predictions, it is about making money. We are never going to be able to predict what will happen next either in the market or in life so let’s just get over it once and for all.
3. There is a random distribution between wins and losses for any given set of variables that define an edge. Trading is like tossing a coin: we can have five wins in a row or five losses; we could win one lose one. Wins and losses are random so do not bet the farm or the crops.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another. Call it what we will but if we have a system, a methodology, a strategy, an edge for locating a trade then we have found an indication of a high probability circumstance that has been historically proven to repeat itself over and over again and will probably do so in the future.
5. Every moment in the market is unique. No matter how many times we have traded an edge the outcome can be different this time and no matter how perfectly matched this pattern is with the last one, this one is truly unique if for no other reason than in this market the participants are not the same as in the last one. The market is too diverse and too fluid to be put in a box, wrapped up and sold to the next consumer.
If we learn the language of the stock market we can understand how to make money. Until then it may just be all Greek to us!
Liked this article, I as Commodity Research Analyst & fresher as a Trader always trade probabilities with managed risk (simply keeping Stop below the level I think my Probability will fail). Sometimes, I was able to catch big moves & many times ended catching wrong bottoms.
One instance, I would like to share whenever I traded simply taking small stop expecting a move I ended up in losses & had fear of incurring loss whereas when I traded on the calls generated by me I made profits & had more confidence those trades.
The only reason (after analyzing my behavior) behind this was If had generated trading call I was accountable to crowd whereas on my short term view on which I would or would not have generate call ended in Loss as I did not have fear of crowd questioning me for that.