I have no idea how something so important is talked about so infrequently when it comes to trading education.
Momentum in your favor. That’s it. That is the holy grail. I don’t care how many countless hours you’ve spent researching a company, their products, their CEO, and all their dirty little secrets. If you enter the trade and the stock does not go up quickly but instead consolidates or even drops, you’re wrong.
Likewise, you can close your eyes and blindly pick a random stock to buy and it could go up.
What’s the difference between the two trades? How come in one instance you put in so much time and effort only to get slapped in the face whereas the other could only be described as luck?
Get ready to have your mind blown: ANY and ALL profitable trades you have made or is going to make IS PURE LUCK.
Read that shit again. One more time.
Now let me explain. In ANY endeavor – gambling, sports, data analytics, business, whatever the heck you choose – if the proportion of ACTION to RESULT is not 1:1, anytime that anything goes in your favor would be the result of pure luck.
We humans and probably all living things like having security. We don’t like dealing in probabilities. This is why having an hourly wage is so popular, I go work for 1 hour I get $35. It’s not like I go work for 1 hour then I have a 90% chance of getting $35. The proportion is exactly 1hr:$35 = 1:1. If I go to the supermarket and exchange $2 for 5 apples, I can always do that, $2:5 apples = 1:1. I know the price of apples can change wise ass, but you pay a certain amount and get some apples – you don’t pay a certain amount for a CHANCE of getting some apples. In 1:1 proportions, things are 100% certain and all luck is removed.
When it comes to something more probabilistic, say Basketball, where you aren’t guaranteed to make the shot every time, luck comes to play. Even if Steph Curry, who has an accuracy of about 70%, makes 5 baskets in a row out of 5 well that’s lucky. The skill he has compared to someone like me is the fact that over a long period of time, he makes an average of 7/10 shots whereas someone like me will make an average 1/10 shots. However, if I also make 5 baskets in a row, does that make me as great as Curry? No, I was just lucky.
Of course you can always work to improve the proportions. I suck ass at Basketball. I’ll make maybe 1 in 10 shots. If I work hard at it each and every single day(which I never will), I can maybe increase the ratio to 1 in 3 shots. However, I can never achieve an exact 1:1 proportion. So even if I improve my ratio by improving my basketball skills, I can never be 100% certain whether or not my next shot is going in. I can only trust my process and leave it up to chance(just like your trading).
When it comes to trading, it does not matter how many hours you’ve put into research, you can never be without a shadow of doubt that your next trade will be profitable. If it does end up a winner, it’s because of… luck.
As I see it, the REAL skill in trading is keeping your losses small enough so that when you get LUCKY in finding a winner, the winner will pay back all your losses and then some.