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Thinking in Probabilities

One of the challenges to becoming a consistently profitable trader is developing the mindset and understanding of how and why a consistently profitable trader can repeat their success. One of the obstacles that stand in the way or prohibit a trader from developing a profitable mindset is emotions. Destructive trading emotion can come from a string of losing trades as well as string of wining trades.

One way to keep these emotions at bay is to think in probabilities. Focusing your mind on the probabilities of your edge following through will relieve the pressure of try to predict what is going to happen next.

One way to understand how thinking in probabilities work is by looking at a casino or the gambling industry. A casino makes money because they understand that they have an edge over the games they offer and if they can maintain the odds if their favor with a large enough sample sizes (hands played) they will come out net profitable. This is the exact mindset a trader should take into trading on a daily basis.

By looking at the casino example we answer the question, how can a random outcome produce a consistent result? If you get the odds in your favor and second if you have enough chances to exploit those odds (sample size). Professional consistently profitable traders treat trading like casinos treat their business, simply a numbers game.

To consistently think in probabilities you have to understand that each individual event (trade outcome) is random and unpredictable but independent of each other. On the other hand over a large enough sample size these independent events can create patterns that can produce consistent and predictable results.

With unforeseen market events being the random and unpredictable variables, a trade relies on the patterns that emerge of the market price action which are base on fixed constant variables (rules/guidelines of your trading plan) that are design to give you an edge in the market.

A profession trader does not know which trades will be winner or losers but understands that if enough trades are executed he/she will come out net profitable. So now consistent profitability is not a function of the market but is a function of how strong you edge is.

 

 

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