If you have been trading in the market and done some research on trading success principles, you must have heard this time and again that trading is all about thinking in terms of probabilities.
Probabilities and thinking on these lines are the focus of this chapter.
The fundamental question that we intend to answer here is: What does it mean to think like this and how can such thinking determine trading success?
How Can Random Outcomes Get You Consistent Results
Most traders get into the trading game with the belief that the market has an outcome that is predictable.
However, even though they believe that the results from the market trades are not probabilistic, they never seem to achieve consistent success.
This negates the theory completely.
When consistent outcomes do not produce consistent results, you cannot really blame a probabilistic outcome for inconsistency of the results.
Well, thinking in terms of probabilities isn’t just as simple.
In fact, more often than not, people find it almost impossible to think in such a manner.
What is it about this thinking pattern that makes it so difficult to achieve?
There are several layers of the reason for this.
At the very basic level, two layers of thinking exist, the micro level and the macro level.
At the micro level, you know that the outcome for each trade cannot be predicted.
You believe in the uncertainty that trading has inherent to it.
However, if you make a collective analysis, you may be able to see a pattern and anyone who has an edge must be able to clinch more wins than losses in the process.
You don’t know what is going to happen the very next moment, but this isn’t something you really need to know as well.
Not knowing the future keeps you from having unrealistic expectations, which in turn keep you focused on what is important.
With the odds in your favor and the willingness to execute flawlessly, you are less likely to make mistakes that can cost you your money and time.
Although, they don’t know the outcome, they know that with the right amount of edge and big enough sample size, the trade will end up in their favor.
Think About The Present Trade Only
From the trader’s perspective, they need to think of the uncertainties at the micro level and the certainties at the macro level.
A master trader must believe that even though the present trade looks like a previous trade and it is possible to link it with what you have already experienced, it is different in the way the market is acting upon it.
You need to understand that for a pattern to exist each and every component of the pattern must be exactly the same as that of the pattern it is being compared with and even if one of the component differs, you cannot really make a comparison.
In every trade that you are going to be involved in, the market will be different from what it was and this makes a comparison meaningless.
There are several tools and market analysis techniques that can be used to make market patterns analysis.
However, even though the pattern may appear the same as far as the numbers and the visual representation are concerned, you cannot really say much about the trader community involved in the trade.
It is their conviction and belief that are going to make all the difference in the price variations.
Remember that even if one of the traders thinks differently, your pattern will no longer be what it is expected to be.
It is evident from the discussion that the only feasible state of mind for you is to exist in the ‘now moment’.
In fact, like we have already said, the fundamental characteristic of the market’s behaviour is the ‘now moment’.
Each moment is unique and there are a host of factors that make this moment unique and incomparable with anything that you have seen or experienced before.
How To Manage Expectations
Expectations are the cause of all heartache in this world.
How? It is not actually your expectations, but your unrealistic expectations from people, things, situations and circumstances that work against you.
Basically, when your expectations are unrealistic, chances are high that things will not turn out the way you expect them too.
Therefore, the result will most likely be something that you weren’t prepared for and more importantly, something that you didn’t want.
What are expectations and how does your brain create expectations?
Pain avoidance mechanisms that exist in you can be detrimental to your trading success if you let them cut you off from all the information and variable that the market is exposing you to.
Try and just watch the market swing.
Do you feel any anger or emotional pain or happiness in the way that it is moving?
The answer will inadvertently be a no.
The reason why the market is not affecting you in this situation is that there is nothing of your own at stake.
When there is nothing at stake, you aren’t hoping for anything and thus, you have no expectations.
Consequently, there are no feelings associated with the way the market runs and flows and the pain avoidance mechanisms do not come into play.
This brings us to a point where you may be wondering as to whether you are expected to be rigid or flexible?
The answer is both!
You need to be both rigid and flexible at the same time.
You need to be flexible in the manner you expect and rigid in terms of the rules you need to follow.
Flexibility in expectations allows you to perceive all the information you need to make a clear decision.
On the other hand, rigidity in rules allows you to live with the confidence that you can protect yourself from the situations that the environment may present to you.
Conclusion – How To Manage Emotional Risk
To manage emotional risk, you will need to inculcate and develop a mental framework that can help you think about the market’s perspective.
You will need to think in terms of the probabilities and believe in the following:
- Results cannot be predicted,
- Anything can happen in the market,
- Every situation is different,
- The outcome is random.
Read more on such market techniques at www.stockmarketsignal.com/how-to-invest/