Our wants, desires and cultural norms have a big impact on how we view the world. We instinctively live our lives thinking in terms of certainty, because this gives us a sense of security and inspires us to focus on what we wish to achieve in the future. Yet, the uncomfortable reality is that there is no absolute certainty: our lives are a made up of probabilistic outcomes. Despite this, however, it is possible to impose certainty on probabilistic outcomes and achieve a high degree of confidence that we will ultimately achieve our goals.
The stock, shares and currency markets are examples of this. There is no guarantee of a particular outcome for any trade: yet we can be certain of a probabilistic outcome. This is where “Probability Analysis” can be successfully applied but it can also be daunting for people to understand.
Think of it this way: a casino has no way of knowing the outcome of a bet that any one of it’s customers makes; the winnings could go the to customer or to the house. However, if the casino has developed a gaming strategy with a 55% probability that the house will win, then the casino has the advantage of making a 5% profit over a very large number of customer bets. For every £100 million that it’s customers gamble every year, the casino can be confident of generating an annual income of £5 million.
This of course means that the casino will lose many bets and will inevitably lose money. However, over a very large number of bets, these losses will be recouped and the casino will generate an overall profit. You can guarantee: casinos are never poor and the house always wins!
The thought of losing money feels very uncomfortable to most people. You must abandon your dependence on certainty and embrace the concept of probability. By focusing on probability analysis, you will impose certainty upon an uncertain world.
To focus upon probability analysis, it is crucial to collect accurate and comprehensive statistical data. Your decision-making process must be firmly based on observable data and analysis, rather than your whims, wants and desires.
Having discipline is the beginning;
Keeping discipline is the progress;
Staying disciplined is the success.
In any industry, job or profession, you work to a set of rules, procedures and safety precautions to make sure that you, your team and the company are working safely towards a desired outcome that is in the interests of both you and the company. Deviation from these rules, procedures and safety precautions will likely end up with either you or your team being injured, or the company being financially harmed.
Trading and investing is no different. You have to work to a set of rules and procedures, known as a methodology in the trading and investing world, to keep you and your finances safe so that you can grow your account towards your desired outcome.
By gathering the evidence based on the rules and parameters set out in your method, you can make objective decisions to establish whether a trade or investment will move you towards your desired outcome or not. If it doesn’t, then do nothing. You cannot lose money if you are not trading and cash is a position too.
Such a systematic approach provides you with a framework to be objective rather than making emotional decisions based on greed and fear. Such an approach also reduces the risk of losing more than you can afford, or letting a big win go down to zero because you did not have an effective exit strategy.
Such mistakes can lead to financial injury, and the psychological damage done usually results in responses such as “it’s a scam” and “trading doesn’t work”.
Can trades and investments fail? Can the charts and fundamentals change? Yes, of course, they can. Yet, by looking at the evidence in line with your framework, you can make a decision that is based on sound statistical analysis and in the direction of your outcome.
When you start to train your brain in probabilistic outcomes, the whole world looks different. You become more objective, calmer, relaxed and are more able to make decisions based on sound judgement.
It’s about upskilling your skill-set based on what is coming in the future and not relying on what has been the status quo in the past. The past does not equal the future. You have to plan and create your future. If you fail to plan, you plan to fail.
With a strict trading and investing methodology including but not limited to analysis techniques, entry techniques, exit strategies and money management techniques, you can create a systematic approach that when applied correctly to high probability trades, you can build up an account with a pot that one day, you will be able to retire on.