Positive Expectation, Scenario Gaming, and Moving Beyond Certainty from Jack Sparrow at Mercenary Trader is one of the best posts about trading ever. It touches on many very important parts of trading and building the correct mindset in an efficient way. Mainly it talks about getting rid of the bullshit, removing (yes removing) certainty.
Warren Buffett once said: “I am a better investor because I am a businessman, and a better businessman because I am an investor.”
We feel exactly the same way about poker and trading.
One of the most important parts of learning a new skill is to be able to take a “fundamental” skill from something previously mastered and translate it to whatever new skill you are working on. The path to failure is more varied than the path to success. Because you are a master in one skill you can understand the different context. By contrasting two things you can see a pattern. Remember: Trading is like poker, trading is not poker.
To reiterate: Traders waste a lot of time, energy and effort on stuff that has NO BEARING on their P&L at the end of the day / month / quarter.
The question you always have to ask yourself is what am I trying to accomplish? Trading can be about entertainment or money. Entertainment costs money. Money buys entertainment. Know the difference.
Traders are ridiculously enamored with the quest for certainty — the impossible safety blanket of “knowing” what is going to happen.
Quest for certainty is an insecurity; net worth or self worth, take your pick. Most people, after 6 months, can look at a chart and see where the market is likely to go. You can know exactly what is going to happen and still mess it up, I know I have done it. You probably did it today. I preach execution because that is the only thing that matters.
You don’t need a crystal ball to do well as a trader.
You can ignore the endless deluge of pointless shit most traders pay attention to.
You don’t need certainty — ever. Probability alone can keep you in clover.
In other words: If you think trading is about knowing the future, you are missing a key point in respect to probability, experience, and scenario gaming.
You aren’t trying to forecast the future per se, you are trying to lay the best odds on different scenarios, so that you can determine when to bet (and when to bet big).
The key to trading is understanding that last statement. How can you be profitable 1% of the trades and still be profitable overall? How can you profitable 99% of the trades and lose money over all? When you understand that it isn’t a frequency issue but an amplitude issue you will do much better. (This assumes you can take a loss financially and mentally.)
Do yourself a favor and read and reread the whole thing here. It is long and takes some decoding but it does a really great job at touching many of the major issues traders have.
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