How can someone produce consistent results from an event that has an uncertain probabilistic outcome? To answer this question, all we have to do is look to the gambling industry. Casinos
make consistent profits day after day and year after year, facilitating
an event that has a purely random outcome. Shouldn't a consistent,
nonrandom outcome produce consistent results, and a random outcome
produce random, inconsistent results?
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| "I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime." Jim Rogers |
What casino owners, experienced gamblers, and the best traders understand that the typical trader finds difficult to grasp is: events that have probable outcomes can produce consistent results, if you can get the odds in your favor and there is a large enough sample size. The best traders treat trading like a numbers game, similar to the way in which casinos and professional gamblers approach gambling. It's the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes the casino and the professional gambler effective and successful at what they do.
Their belief prevents them from engaging in the pointless endeavor of trying to predict each individual outcome. They have learned and completely accepted the fact that they don't know what's going to happen next. More important, they don't need to know in order to make money consistently. Because they don't have to know what's going to happen next, they don't place any special significance, emotional or otherwise, on each individual hand, spin of the wheel, or roll of the dice. In other words, they're not encumbered by unrealistic expectations about what is going to happen, nor are their egos involved in a way that makes them have to be right. As a result, it's easier to stay focused on keeping the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making costly mistakes.
A probabilistic mindset pertaining to trading consists of five fundamental truths:
- Anything can happen.
- You don't need to know what is going to happen next in order to make money.
- There is a random distribution between wins and losses for any given set of variables that define an edge.
- An edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.
See also:
James B. Rogers Jr. in Jack D. Schwager (1992) - The New Market Wizards: Conversations with America's Top Traders.
Nassim Nicholas Taleb (2001) - On Randomness, Uncertainty, and Probability.
Nassim Nicholas Taleb (2001) - On Randomness, Uncertainty, and Probability.