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Trading is Not to Hit Home Run

Trading is not about hitting homerun or finding that one trade that will change your life forever. Being consistently profitable doesn’t mean making money every day. Being consistently profitable means that despite all the unavoidable losses you incur along the way, you are still making money, on average, over time, as the number of trades you take grows.

Trading is about being able to follow a clearly defined strategy that makes profit over time, a strategy that will allow you to compound your money over the years. When you are able to do so, your wealth can grow exponentially over time (if you reinvest the profits).

Why is Casino always profitable? For instance, a roulette has 18 blacks, 18 reds and 2 greens, in every round, the ball can land in anyone one of these 38 numbers.  If you bet on the black colour, your winning probability is 18 /38 = 47.4%. Same outcome if you bet on the red colour. Thus, the winning probability of casino for each round is (1-47.3%) = 52.6%. This gives casino the statistical edge of 5.2% over you. Hence, statistical edge is the key, which explains why casino is always profitable and their only fear is not about you winning them millions but is that you no longer visit them!

The same applies to trading. No one wins every trade. Career day traders use a risk-management method called the 1% risk rule, or vary it slightly to fit their trading methods. Adherence to the rule keeps capital losses to a minimum when a trader has an off day or experiences harsh market conditions, while still allowing for great monthly returns or income. Following the rule means you never risk more than 1% of your account value on a single trade, to make a profit of 2% (or more) of your capital.

In summary, the most valuable realisation to a trader is when one can view each occurrence in their trading as a random series of events with random outcome. It’s only the outcome over a larger statistical set (e.g. 50 trades, 100 trades, 200 trades) that result in consistent and predictable profits.

At the micro level, the outcome of trading is random and unpredictable. Don’t be too concern if you experienced a losing streak over a small number of trades.  But at the macro level, the outcome is predictable when you found a trading strategy that has the statistical edge and repeat the strategy to grow your wealth over time.



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