Considering probability can liberate your trading
The truth is that a guaranteed win in trading does not exist. All trade setups have a likelihood of success and failure. Certainly some trades have a better chance of succeeding than others, but the assurance of a sure win is false. Understanding probability is generally referred to as having a probabilistic mindset and it's important for traders to have it, because it realistically balances your trading confidence. Without it, a trader has a tendency to be risk averse or a risk taker.
Explaining the need for a clear win
Most beginner traders want to know the outcome of a trade before they make it and will generally not make a move until they are absolutely certain of a trade winning. Seems fair enough you might argue - but what if you were wrong about your assumption and lost a great opportunity on the trade you passed over? A probabilistic mindset would tell you that in trading, it's all about probability over the long term and not per trade.
So why is trading with a probabilistic mindset so difficult? One could speculate about humanity's historical roots where risk avoidance kept us alive. Or perhaps it's just because money is on the table? These reasons could make sense, but let's leave the analysis over to psychologists. For now it's key to understand that traders naturally have the desire to be right – probabilistic thinking is certainly not automatic.
Impact on our trading
Traders often respond to entering, exiting and managing trades in two ways - either over or under confident.
On one side traders can be overly confident of their setup or themselves as traders. They fail to recognize that trading the markets is an activity where uncertainty is prevalent. These traders think they are always right and the markets are always wrong. They are simply not familiar with the concept of probabilistic decision making, which says that there is never a sure win in the world of trading.
On the other hand traders can be under confident of their ability to trade the markets. These traders realize that their setups are estimations and that makes them fearful of the markets. They understand the need for incorporating a probabilistic mindset, but they lack the conviction needed to stay in a trade.
A simple solution
The answer is surprisingly simple. Namely, never treat a trade as a sure win but do wait for trades that inspire your confidence. Finding this middle ground is an important step that allows traders to approach trading with a balanced, critical and probabilistic mindset.
Each trader needs to find their own customized answer. Some traders are bigger risk takers who will be best served focusing on risk management and realistically assessing their success rate of setups. Other traders are naturally more fearful of the markets, who would benefit from defined strategies, trade management rules and trading higher quality setups to help mitigate their lack of conviction.
Regardless of your trading bias, you need to realize that trading involves a lot of insecurity. Again, there is no such thing as a guaranteed win. The easiest way to accept this fact, is to embrace it.
In the field of trading, a never-make-a-mistake mindset is dangerous. Losing individual trades and taking some level of risk, are pre-conditions to winning in the long run. Avoiding acceptable level of risks and aiming to be consistently correct, will not lead to profitability.
Creating a probabilistic mindset will take time and does initially require conscious effort, but practice will bring reward - just not perfection.
Cheers and good trading,
Chris
