We live in a world where absolutes are often the norm. For example, you do not need to remind me on a daily basis that the sun will be rising early in the morning. The sun rises; it is a given that the sun will rise and we don’t give it a second thought.
In general, scientific knowledge deals with absolutes. Our text books describe gravity, acceleration, algebra and a host of other topics that have long been well understood and proven to be true. We do not debate or fret over these types of facts because their authenticity and truth is a given.
Most of us would like to live in a world of truths and absolutes because the outcomes of various probabilities can be ascertained and understood with precision. I often think the world of absolutes is a nice place to spend time, for the outcomes are known and can easily be assimilated into a plan.
There is another world to consider, though, and that is the world of probabilities. There are no absolutes in probability, only potential outcomes based upon past experience or hypothesized in theory.
One of the toughest and most abstract concepts to learn in E mini trading is the theoretical outcomes of any given action. Most people would like to think that if variable (a) occurs, then (b) will be the result. It just doesn’t work that way in trading the ES E mini contracts, or any other investment. There is a wide range of potential outcomes from any trade, and choosing the proper trade becomes a tangled (and sometimes confusing) analysis of a variety of variables and formulating a plan based upon your assessment of the probability of success. Notice I mentioned “probability” of success. When dealing with investments there is only one probability that I consider; the market will open as scheduled on Monday thru Friday. (and even this probability is subject to various potential eventualities like a power outage, an earthquake, or a range of other uncontrollable variables)
So trade evaluation becomes a process of variable analysis in an attempt to answer one very basic question: Which trade choice will result in a profit and which trade will result in a loss. For many, this uncertainty is debilitating and their careers in the trading business are short lived. Absent of absolute truth, trading resides in the murky gray muck of probabilistic thinking. I have often, in my own mind, compared trading to those individuals who choose not to fly in airplanes; the probability of a crash, which is real or imagined, is simply more than their mode of “absolutes” in life is ready to assimilate. And so it is with trading, it’s not for everyone.
In many of the articles I have written I speak often about the psychological aspects of E mini trading and attribute, to a greater or lesser degree, many of the psychological phenomena traders experience to the constant assessment of the unknown. It can be truly disheartening to find a trade that you have profitably executed numerous times and have it fail. Let’s say, just for example, that a trade has a probability of success of 80%. In this trade you would have a very high probability for success. Of course, many traders fail to remember that there is a 20% probability of failure, and over a period of a number of trades, this probability will eventually come into play. Your beautiful trade set up will fail and you will be left scratching your head. What went wrong?
The answer is a simple one, but a bitter pill to swallow. Nothing went wrong, as a matter of fact the trade went exactly as it should but fell into the less probable category of outcomes. This aspect of probability is what trading is all about. Assessment and acceptance of risk based upon probability. Of course, as you take less probable trades, your risk of failure increases exponentially. The bottom line in trading is an interesting yet enticing proposition: Absolutes do not exist in the world of futures trading, just probabilities.
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