THE TRADER'S EDGE: THINKING IN PROBABILITIES

• 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.
• Losses are simply the cost of doing business or the amount of money I need to spend to make myself available for the winning trades.
• Thinking in probabilities requires two layers of beliefs that on the surface seem to contradict each other.
• The second layer of belief in probabilities is the macro level, where you have to believe that the outcome over a series of trades played is relatively certain and predictable.
• The degree of certainty at the macro level is based on the fixed or constant variables that are known in advance and specifically designed to give an advantage (edge) to one side or the other.
• 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 makes the casino and the professional gambler effective and successful at what they do.
• Successful casinos and professional gamblers stay focused on keeping the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making costly mistakes.
• Market analysis finds behavior patterns in the collective actions of everyone participating in a market.
• In trading, the unknown variables are all other traders who have the potential to come into the market to put on or take off a trade.
• Each trade contributes to the market’s position at any given moment, which means that each trader, acting on a belief about what is high and what is low, contributes to the collective behavior pattern that is displayed at that moment.
• If there is a recognizable pattern, and if the variables used to define that pattern conform to a particular trader’s definition of an edge, then the market is offering the trader an opportunity to buy low or sell high, based on the trader's definition.
• The fact is, the outcome of every (legal) trade that anyone decides to make is affected in some way by the subsequent behavior of other traders participating in that market, making the outcome of all trades uncertain.
• Since all trades have an uncertain outcome, then like gambling, each trade has to be statistically independent of the next trade, the last trade, or any trades in the future, even though the trader may use the same set of known variables to identify his edge for each trade.
• If the consistency of the group of traders who are creating the pattern “now” is different by even one person from the group that created the pattern in the past, then the outcome of the current pattern has the potential to be different from the past pattern.
• The most fundamental characteristic of the market’s behavior is that each “now moment” market situation, each “now moment” behavior pattern, and each “now moment” edge is always a unique occurrence with its own outcome.
• Being aware of uncertainty and understanding the nature of probabilities does not equate with an ability to actually function effectively from a probabilistic perspective.
• Our minds cause us to perceive what we know, and what we know is part of our past, whereas, in the market, every moment is new and unique, even though there may be similarities to something that occurred in the past.
• Belief that to be a disciplined trader one has to define the risk and put a stop in.
• Most people know that the outcome of a coin toss is random.
• Information is not tangible.
• Information in the form of words or gestures expressed by the environment or up and down tics expressed by the market can be just as painful as being hit with a solid object; but there’s an important difference between information and objects.
• A probabilistic mind-set 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, and Every moment in the market is unique.
• We can’t expect something that we have no knowledge or awareness of.
• When you make these truths a fully functional part of your belief system, the rational part of your mind will defend these truths in the same way it defends any other belief you hold about the nature of trading.
• In what way does a trader have to learn how to be rigid and flexible at the same time? The answer is: We have to be rigid in our rules and flexible in our expectations.
• If you believe the outcome is random, then you naturally expect a random outcome.
• At the collective level, your edge may look perfect in every respect; but at the individual level, every trader who has the potential to act as a force on price movement can negate the positive outcome of that edge.
• Potential to experience emotional pain comes from the way you define and interpret the information you’re exposed to.
• There is no universal mind-set to assure us that we will share the potential negative or positive effects of information in the same way.
• You haven’t projected what you believe, assume, or think you know about that market into some future moment.
• If there’s a difference between what we want or expect and what the market is offering or making available, then our pain-avoidance mechanisms kick in to compensate for the differences.
• Any information that has the potential to be threatening also has the potential to be blocked, distorted, or diminished in significance by our pain-avoidance mechanisms.
• Remember, the market is always communicating in probabilities.
• If we’re going to feel great if the market does what we expect it to do, or feel horrible if it doesn’t, then we’re not exactly neutral or open-minded.
• All the distinctions that would otherwise be perceivable become perfectly clear after the fact when there is no longer anything for our minds to protect us from.
• When we expect to be right, any information that doesn’t confirm our version of the truth automatically becomes threatening.
• Randomness implies at least some degree of uncertainty.
• You have to be able to interpret the information as negative to experience it as negative.
• Create a mental framework or mind-set that is consistent with the underlying principles of a probabilistic environment.
• What we know is synonymous with what we have learned to believe about the ways in which the external environment can express itself.