Trading is about
probabilities not predictions
Many
of the people that start out trading futures feel that there is a comparison
between trading and casino gambling. Gambling is the wagering of money or
something of material value on an event with an uncertain outcome. This is not
the case with trading.
In
many ways there are similarities between trading and gambling, but one of the big
differences is, a skilled futures trader will be taking the position of the
house and not the gambler. Anyone that has spent any time in the casinos knows
the house always wins in the end.
In
finance, trading is described as an exchange of a security (stocks, bonds,
commodities, currencies, derivatives or any valuable financial instrument) for
"cash". Both parties seek to derive value from the trade. Some traders
think this makes trading is a zero sum game where someone has to lose in order
for someone to win. On a macro scale this may be true, but not for the
professional futures traders.
As
the trader assumes a position on an instrument in the market, he or she may be
relieving someone of their profitable position. At this point they may go on to
make even more profits out of this instrument.
At some point in trading a poorly executed trade may be made and loses may
occur. Generally this happens when the market unexpectedly shifts directions
and traders move out of positions so as not to expose themselves to even
greater loses. This result can be, but is not always part of a trading system. Most
trading systems will have an acceptable lose ratio.
A
quality trading system is based on statistic and probabilities. An experienced trader will look for signals.
These signals are tested and based on quantifiable information, compiled over a
long period of time. These trading signals with have safeguards built in and
will also have probabilities attached to the actions.
Also
included in the trading system will be rules to follow. These rules are composed of pre-determined
targets and stop losses. There will be variables in the trading system and they
will be documented and specific actions will be followed based on the variable.
If
the trading system is performed accurately without mistakes there is an
anticipated outcome probability. This outcome will achieve a profitable result.
This is not gambling.
As
a simplistic example, take the coin flip game, heads or tails. The guaranteed
outcome of this game is 50%. If a player chooses heads every single flip of the
coin, what are the outcome probabilities? They can only be 50%, so if the
player chooses heads every time it’s not gambling. The maximum target is always
achieved.
So
how does someone win at this game? The easiest answer is to adjust the payouts
to someone’s favor and maintain the system as it becomes profitable.
Obviously
trading systems are more complex and there are multiple facets to trading,
including the system itself, the mechanical actions and requirements of the
trader are equally important, and the inherent human nature to change the rules
based on outside influences is one of the hardest parts to overcome.
Trading
is about probabilities, stick with the system consistently and you will have
consistent results. Remember, trading should not be gambling.
Jordan
Schleider is a successful semi-retired entrepreneur and venture capitalist with
a strong business and engineering background. His widely varied portfolio of
businesses includes software, hardware and networking design and implementation,
construction, building and real-estate development, mental health, and fitness
centers, as well as business consulting, restaurants and nightclubs. He has a trading and investing knowledge base
that spans over 20 years, and he has recently taken a strong interest in
teaching others what he has mastered. His most recent undertaking, NQ Trader,
is a small boutique educational trading school, devoted to helping traders
master their skills.
No comments:
Post a Comment