How to Win at Probability Games

Kamal531

一, Probability Games

In fact, not only trading is a game of probability. In life, from small things like crossing the street (Is it safe to cross the street when the light is green?) to choosing friends (Is this friend reliable?), and from big things like career choices (Is trading really a good profession?) to marriage decisions (Will we be happy together?), everything involves evaluating risks and rewards in a game of probability. Because we don't have the ability to predict the future, there is always a certain level of risk involved in everything we do, and 100% certainty is impossible.

One of the critical reasons many people make mistakes in trading is the lack of a probabilistic mindset. They often rely on emotions rather than rationality when making trades. Emotions are essentially our primal instincts, and in the market, these instincts can trigger many human weaknesses and amplify them. This is why most people who enter the market end up failing.

Two, Reasons for Trading Failures

Reason 1: Human Nature

The vast majority of people have a weakness: they like to take small advantages and fear small losses. In the market, as soon as they see a small profit, they immediately cash in and exit, but when they face a loss, they hold onto the losing position, hoping to break even, which ultimately leads to small losses accumulating into significant losses.

In the market, prices either go up or down; otherwise, they remain unchanged. In the long term, without considering transaction costs and slippage, the probability of making or losing money is roughly equal, which means that for most people, their trading methods become negative expectation strategies with limited profits and unlimited risks. Their trading statements should look like this: Small Gains >> ... >> Small Gains >> Big Losses.

In real life, this is similar to the mindset of poor people versus rich people. Poor people dislike risks, fear losses, and prefer jobs with guaranteed income and stability. Even if they are not 100% certain about something, they would refuse to do it. This approach may seem reasonable on the surface, but it carries a substantial opportunity cost.

Rich people, on the other hand, are more willing to take risks. They know that risk and reward are directly proportional, and opportunities are born within risks. They evaluate risks reasonably and, when risks are manageable, they place bold bets.

Reason 2: The Love for Fast Money

A foreign institution once conducted a study and found that, in the long run, the net annualized return on equity in most industries is unlikely to exceed 15%. However, many retail investors consider a 15% return in the market to be nothing to brag about. People tend to be drawn to making quick money, which translates into heavy trading and short-term trading.

977Iti

"To win money, you also need luck."

Iravan774

"Regardless of the situation, when playing gambling, it's essential to learn how to gamble rationally."