Making sense of trading
Trading is to some extent very irrational. You can be rational yourself but since the market is not and the price is unpredictable your decisions will still be irrational. I understand that what I’m saying may seems weird, but it’s as if you were in a casino and someone was asking you to choose if you should bet on the red or on the black. It doesn’t matter how detailed your analysis is behind the decision, at the end your decision will still be irrational because you have to make a decision on a future event which is unpredictable.
How to make sense of this? Here are some thoughts:
– Significant gains are unpredictable but significant losses are not: What I mean by this is that it’s true that you cannot control where the gains will come from but you can avoid disastrous losses simply by controlling how you allocate capital. A rational strategy would be to build your portfolio in a way that no matter what happens you never compromise your ability to “fight another day” since you never know where the next winner will come from.
– The outcome of individual trades is unpredictable but the outcome of the methodology is not. If you have your strategy and your methodology that is really what you are trading. You’re never trading the individual trade, you are trading the methodology.
– What matters is how much you make when you’re right and not how often you’re right. In early stage situations where the failure rate is very high what matters is to have at least one good winner, once you have that it doesn’t matter what the losers did.