Treat all trades equally. Recognize that the outcome is random and is not relevant to your immediate performance.
This belief is mentioned between successful traders all the time, but what does it mean exactly?
Treat all trades equally.
Where is this coming from?
To explain this lets talk about coin flipping.
For perfectly weighted coin, the probability that it is going to flip on head or tail is 50/50. The probability that it’s going to flip on head is 50%, probability that it’s going to flip on head two times in a row is 25%, for three times in a row it’s 12.5%.
So, if we just flipped head on the coin, what is the probability that next will be tail? You would say 75%. But if you do not consider previous coin flip you would say 50% even though there was a coin flip before. Treat all trades equally would suggest exactly this , not to consider previous trade when taking the next one.
Well, here is the math.
Probability in coin flips that there will be two heads in a row is 25%. So lets think that we can use this as edge and prove wrong. This means that there is 75% chance that tail side will be flipped after flipping head side. In 1000 coin flip sample. we will have 500 opportunities, each with 75% probability. This means that we will win in 375 of those opportunities. This means that 125 times head side will be flipped again and we will lose. This means that possibility of flipping heads two times in a row is 12.5% when actually it should be 25%. We have CONTRADICTION! This means that we can’t look at previous coin flip to predict the next one, the chance is still 50/50.
That’s why you should treat all trades equally
Recognize that the outcome is random and is not relevant to your immediate performance.
If you can’t predict next coin flip when knowing the previous one it means that outcome is random.
Hope that this was useful for at least one person.
Cheers and have many green PIPs with a touch of red ones!