Probability Thinking

Here is an article I wrote in May 2000. It’s as true today as when I first wrote.

Consistently successful trading is based on a specific mental mindset. Before we can consider the nature of that mindset, we first have to consider my approach to epistemology (the nature of and means by which we acquire knowledge).

I belong to the “out there as seen by the in here” school – i. e. I believes there is an objective reality but that the perception of that reality is distorted by an individual’s beliefs, values and rules. In NLP terminology, this is known as “the map is not the territory” principle. The corollary of the principle is the idea that the closer the map resembles the territory, the more successful an individual will be in dealing with life.

So what has all this to with trading?

Reflect that market information is one aspect of reality. If we distort our sensory perception then we are likely to perceive it inaccurately. Fear causes the greatest distortion. Once fear invades our thinking processes, then either immobilisation and/or myopia are the result. By immobilisation I mean the inability to respond appropriately to market information; by myopia I mean the inability to “see” information that runs contrary to our current view of the market.

The key difference between the successful trader and the majority is that the former perceives market information as a constant flow of opportunities whereas the latter sees it through veil of fear.

The successful trader achieves his more accurate perception because he has no fear of losing money on any individual trade. This lack of fear is achieved because he holds two apparently contradictory beliefs:

  • The belief that the market is unpredictable and uncertain and
  • The belief that the market is certain and predictable.

The successful trader resolves the conflict because the first belief pertains to each individual trade whereas the second pertains to trades over a large sample size. Both beliefs are held not only on the intellectual level basis but also at the emotional and every other level of a trader’s beliefs.

As a result of these beliefs, other beliefs follow:

  1. Each trade is unique and independent of previous trades
  2. Profits and losses are randomly distributed
  3. Profits are not dependent on knowing the outcome of an individual trade.

Indeed as Mark Douglas in Trading in the Zone says:

” The extent to which you think you know, assume you know, or in any way have to know what is going to happen next, is the same degree to which you will fail as a trader”.

The successful trader takes FULL responsibility for the outcome of each and every trade.

The successful trader derives certain benefits from holding these beliefs: Because he has no fear: –

  1. He sees the endless opportunity the market provides.
  2. He operates in the “NOW” moment rather than being held prisoner from a past trade or a future event yet to happen
  3. He operates from balance rather then from recklessness or fear.
  4. He enters the “zone” at will.

“Zone trading” is defined trading when one is in harmony with the market.

With harmony, he can minimize his losses and maximise his profitability.

4 thoughts on “Probability Thinking”

  1. G’day Ray
    And I thought ‘epistemology’ was an all Australian pastime……
    Funny about the ‘zone’. i don’t so much notice when I am in it, but have a few clues as to when I slip out of it. One of my clues is hope. As soon as I look at a market with the hope it will go in a direction, a big red flag goes up. I know that I need to do something. Gathering supportive only clues to my trade is another giveaway for a bent mindset. Oddly, these personal traits are not either on or off, but rather appear on a sliding scale. So, even though they be getting more dominant in my thinking, they are not always apparent and obvious to me. Now that I know that they exist for me, I go looking for them. Awareness is key for me. Being vigilent for my clues.

  2. I am in total agreement with Stuart’s comment of realizing he needs to do something when the red flag of “hoping” is raised. As I’ve grown and become more successful, I too seem to be more sensitive to this. I know when a trade is not working much quicker, and when I hesitate swinging the ax, I am only tempted to tell myself how stupid it was to not swing it sooner… not how stupid I was to be in the trade.

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