At The End Of The Tunnel, You "May" See Light

Trading
1

Hey folks,

Have you ever experienced the exasperation of playing Ludo, where you’re on the verge of winning, just one step away, but the dice refuses to roll a 1? Meanwhile, your opponent, with their last piece still far off, keeps getting all the fives and sixes they need, even the elusive 1 you are looking for. As you wait for that crucial roll, they snatch victory from you. How does that make you feel? Have you ever felt like you’ve genuinely lost, or did you curse the dice or your luck?

Imagine flipping a coin with your friend, each side with a 50% chance, to decide who washes the dishes that night. But as your friend scrubs away the dishes, cursing both you and their luck, it becomes clear that chance wasn’t on their side this time.

Consider a game of poker or any casino game, where outcomes rely heavily on luck or probability. Each hand dealt or spin of the wheel presents a new chance, where winning or losing isn’t taken personally but attributed to the whims of chance.(Although it’s a well known fact that odds are in favor of the Casino)

Then why is it that in trading, individuals often internalize their results, feeling personally responsible for losses and linking them to past failures? This leads many dedicated learners who adhere to sound trading systems to feel discouraged. Conversely, for narcissists, blaming the market rather than themselves is common. But both will still, after exhausting their “luck,” may exit the market, believing they are inadequate or in the wrong place.

If you’ve delved into Mark Douglas’ “Trading in the Zone,” you’ll find his eloquent explanation on the randomness of trading outcomes. He emphasizes the importance of analyzing trades as part of a series, rather than individually, as each trade’s outcome is entirely random. The market participants vary at any given time, affecting results even with the same setup.(Check out this video of Mark:-https://www.youtube.com/watch?v=GhKJ9P3agRc)

If your trading strategy holds a positive expectancy, you’ll find profitability over a series of trades. Let’s consider you’re planning to execute 20 trades with a 40% strike rate and a 3:1 reward-risk ratio. It’s possible that the initial 12 trades may not play out in your favor. This is the phase where many traders start losing faith, quitting, or lamenting about the market, despite having a winning strategy. This underscores the importance of maintaining the right psychology and mindset in trading. Even with the best strategy, if our mental approach is flawed, our trading results will suffer. Each trade that goes against us can evoke feelings of failure, and when fear grips our psyche, our focus diminishes progressively.

So, how do you tackle this? As Mark suggests, set your stop-loss for each trade and multiply the loss amount per trade by a comfortable factor, such as 25 or 20, whichever holds good for you but larger the sample space, better the accuracy of the outcome. Mentally accept this multiplied amount as a loss even before initiating your first trade. For instance, if your risk per trade is Rs 2000, multiplying it by 25 yields Rs 50,000. Make peace with this sum being already gone. By pre-emptively accepting this potential loss, you alleviate fear and avoid leaving potential gains on the table. With this mindset, market fluctuations won’t sway your commitment to your plans, recognizing that trade outcomes are essentially random. Similar to paying a fee before betting in poker, you detach emotionally from losses, paving the way for potential success if your approach demonstrates a positive expectancy.

If it turns out that your system had a positive expectancy, congratulations, you have found the light at the end of this gruesome trading journey’s tunnel.

Ciao Adios!!

3 Likes
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:star_struck: :star_struck: :ok_hand: :ok_hand:

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One cannot know this upfront in a time-bound manner though. :slight_smile:

Of course one can try to limit oneself to ONLY trade under these circumstances.
But, then one might need to wait quite long and end-up paying the opportunity cost.

Well… sounds good, not quite actionable, right?
Similar to saying always buy-low and sell-high.

This is not practical unless you can stay afloat until the right conditions for the positive payout to occur.

Thoughts?

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In short term these number vary widely, so yes next 20 trades, 40 trades etc anything can happen and we cannot really control R:R etc.

But if there is long term edge, and market continues to behave similarly - which it usually does, we tend to go towards long term expectancy - and even long term expectancy can vary a bit.

But the main idea that you accept your drawdown, keep executing and an edge should play out over long term is valid. There is uncertainty always ofc.

But why one will not stay afloat ? This is the task of risk management. We keep dd under control, say within 10-15% based on historical results and eventually edge plays out. Future DD might be more and we can give some room, but if backtest was done properly we generally can manage this. Things moves in cycles, we get good phases and tough phases.

So this is possible, there is always some degree of uncertainty which we can alleviate through diversification, reducing risk etc - but this is how trading works and has worked for me and others.

1 Like
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Exactly! :sweat_smile:
All this (and more) is necessary
and was missing from (or IMHO atleast NOT sufficiently highlighted in) the original post.

Hence, i wanted to highlight that
discovering an edge / positive-expectancy
is not sufficient on its own.

At The End Of The Tunnel, You “May” See Light

To OP’s credit, they did title the post “May” and not “Will”.
I would like to highlight this aspect further.

Also, another aspect i would like to highlight is that,
all these trading strategies that one can think of,
they are not competing against capital at rest (i.e. 0% returns).

The risk-free rate of returns in sovereign bonds (GSECs/TBILLs) is around 7-8% per year right now.

That too with a set-it-and-forget-it approach
which does NOT involve

  • one spending time researching the fundamentals/technicals
  • one actively focusing on the market to get the entry/exit times/prices right.

Hopefully, any active trading strategy one comes-up with,
provides higher returns to compensate for the additional time
one actively has to spend in trading tasks (compared to passive investments),
and of course also to account for the uncertainty-risk one is assuming.

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This is the absolute minimum. But since we take risk, it wont be unfair to compare against something like index funds in the long run at the least - returns / drawdown.

When testing for edges, one way to do this is to compare returns against buy and hold of underlying. I do this in my initial very basic test of entries. Something like this (ignore the results its tested for another market, ours is different ) -

1 Like
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@cvs OP is talking to a certain traders that are not on level 1. Such traders have already tested/backtested their strategy and know the expeceted returns of their strategy.

When they start forward testing the strategy with real money though, then those psychological effects hit you as described by OP.

Here’s my 2 cents. Some people are just not meant for this. You can say “detach from losses” but that’s not actionable. Either one can do it or they can’t. I don’t think this can be taught either. Some people are naturally able to accomplish it.

1 Like