Posts tagged ‘Law of Large Numbers’
Trading is a stochastic process; i.e, the outcome of each trade is not deterministic and has a distinctly random bias. Sometimes you win, sometimes you lose. Sometimes you win big, sometimes you take it in the pants. Often your winning or losing trades will cluster together in a row; Other times, they’ll alternate in a more noisy fashion.
When I first started trading nearly 100% of my focus was on the percentage of my trades that were winners (win probability). After all, winning feels good and I wanted to maximize that much as possible. But over time I learned that the win probability of a system is largely irrelevant (regardless of how good it makes you feel); Instead of worrying so much about winning I really should have been focusing on my system’s expectation.