More probability?

Published on 12 November 2020 at 10:53

The hardest part of working with probability is that you can do everything right, and still have an outcome you do not like.

We learn from our mistakes and we adapt to avoid making those mistakes again and again. In real life, this works because that is how you learn a skill or even run a business. When the desired outcome is not something you like, you look at what you are doing and adapt.


In a situation of working with probability, however, the story changes. You can not rely on the outcome anymore to determine if you are doing a good job. The outcome becomes a random event.


Trading and developing a trading plan that you could use is hard to make if you can not rely on the outcome of any one trade. 


How do you know if your skills are good if you can not rely on your outcome?


Well, you go from black and white thinking or good or bad, wrong or right to more of a grey area. You have to start thinking in terms of odds. You do one action over and over, and then you take the multiple results. When you do this, you get a probability number. If you do for example 100 trades from a setup that is well defined then you could see how many trades won and how many trades lose. 80 winners and 20 losers, is an 80% winning probability.


That is the theory.


In practice, you have to deal with your mindset to be right, your feelings about losing, and really understand that 80% winning, is not:  The next trade is a winner.


There are many tools to use to really understand what it means to think in probabilities.


Reading a book from Annie Duke, “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” is a wonderful place to start.

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