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The Five Fundamental Truths of Trading
1. ANYTHING CAN HAPPEN.
There are always unknown forces operating in every market at every
moment; it takes only one trader somewhere in the world to negate the
positive outcome of your edge --- only one. Regardless of how much
time, effort, or money you've invested in your analysis, from the
market's perspective, there are no exceptions to this truth. Any
exceptions that may exist in your mind will be the source of conflict
and potentially cause you to perceive market information as
threatenting.
2. 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. In other words, based on the past
performance of your edge, you may know that out of the next 20 trades,
12 will be winners and 8 will be losers. What you don't know is the
sequence of wins and losses or how much money the market is going to
make available on the winning trades. This truth makes trading a
probability or numbers game. When you really believe that trading is
simply a probability game, concepts like “right and wrong” or “win and
lose” no longer have the same significance. As a result, your
expectations will be in harmony with the possibilities.
Nothing has more potential to cause emotional discord than our
unfulfilled expectations. Emotional pain is the universal response when
the outside world expresses itself in a way that doesn't reflect what we
expect or believe to be true. As a result, any market information that
does not confirm our expectations is automatically defined and
interpreted as threatening. That interpretation causes us to adopt a
negatively-charged, defensive state of mind, where we end up creating
the very experience we are trying to avoid.
Market information is only threatening if you are expecting the market
to do something for you. Otherwise, if you don't expect the market to
make you right, you have no reason to be afraid of being wrong. If you
don't expect the market to make you a winner, you have no reason to be
afraid of losing. If you don't expect the market to keep going in your
direction indefinitely, there is no reason to leave money on the table.
If you don't expect to be able to take advantage of every opportunity
just because you perceived it and it presented itself, you have no
reason to be afraid of missing out.
If you believe that all you need to know is :
a) The odds are in your favor before you put on a trade;
b) How much it's going to cost to find out if the trade is going to
work;
c) You don't need to know what going to happen next to make money on
that trade; and
d) Anything can happen;
then the market can't make you wrong. The market can't generate
information about itself that would cause your pain-avoidance mechansims
to kick in so that you exclude that information from your awareness. If
you believe that anything can happen and that you don't need to know
what is going to happen next to make money, then you will always be
right. Your expectations will always be in harmony with the conditions
as they exist from the market's perpective, effectively neutralizing
your potential to experience emotional pain.
Furthermore, a losing trade or even a series of losing trades can't have
the typical negative effect if you really believe that trading is a
probability or numbers game. If your edge puts the odds in your favor,
then every loss puts you that much closer to a win. When you really
believe this, your response to a losing trade will no longer take on a
negative emotional quality.
3. THERE IS A RANDOM DISTRIBUTION BETWEEN WINS AND LOSSES FOR ANY GIVEN
SET OF VARIABLES THAT DEFINE AN EDGE.
If every loss puts you that much closer to a win, you will be looking
forward to the next occurrence of your edge, ready and waiting to jump
in without the slightest reservation or hesitation. However, if you
still believe that trading is about analysis or about being right, then
after a loss you will anticipate the occurrence of your next edge with
trepidation, wondering whether it's going to work. This, in turn, will
cause you to start gathering evidence for or against a trade. You will
gather evidence for the trade if your fear of missing out is greater
than your fear of losing. And you will gather information against the
trade is your fear of losing is greater than your fear of missing out.
In either case, you will not be in the most conducive state of mind to
produce consistent results.
4. AN EDGE IS NOTHING MORE THAN AN INDICATION OF A HIGHER PROBABILITY
OF ONE THING HAPPENING OVER ANOTHER.
Creating consistency requires that you completely accept that trading
isn't about hoping, wondering, or gathering evidence one way or the
other to determine if the next trade is going to work. The only
evidence you need to gather is whether the variables you use to define
an edge are present at any given moment. When you use "other"
information, outside the parameters of your edge to decide whether you
will take the trade, you are adding random variables to your trading
regime. Adding random variables makes it extremely difficult, if not
impossible, to determine what works and what doesn't. If you're never
certain about the viability of your edge, you won't feel confident about
it. To whatever degree you lack confidence, you will experience fear.
The irony is, you will
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