LAW OF LARGE NUMBERS

Besides loving to trade and possessing an extremely compulsive personality, I am ardent subscriber to the theorem, the law of large numbers, and on an occasion when I have too much too drink, a literal believer in the infinite monkey theorem.

In probability theory, the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed.

A great deal of traders interpret this law in a negative way, reasoning that the more they trade, the greater the chance they will have losing trades, which would result in exacerbating current losses, or giving back current profits. What they don’t take into consideration is that the law is postulated on the premise of random events, i.e., a coin flip or the spin of a roulette wheel. Obviously, if you flip a coin 6 times, you may see 6 consecutive heads or 6 consecutive tails, but if you flip that same coin 100 times, you will probably realize app. 50 heads and 50 tails.

However, while trades are statistically independent events, and one trade has no bearing on another trade, they are not simple random events. Trading decisions may appear to be binary; either buy or sell or up or down, but they are not. There are a critical variables which must be accounted for, such as how much higher or lower is the market is going to move, or in other words, what is the risk/reward of the trade and how do I manage the trade. So, there is something other than chance that comes into play when trading, and that is skill and technique.

It stands to reason then, that the better your skills and technique, the more you should trade. While LLN is important because it "guarantees" stable long-term results for random events, it follows that it is also important that your sample of trades is large enough to maximize the number of successful outcomes from your skillful trades and therefore maximize your earning potential.

You can't find yourself subscribing to the theory that " you're only as good as your last trade. " If you are going to trade for a living, there is no last trade, only the next trade. Whether, your last trade was a winner or a loser, it has absolutely no bearing on the outcome of your next trade. Look forward to taking your next trade, because it's going to be the best trade you have ever made. At least, that's how you should be approaching it.

Unlike gambling, a winning streak by a trader will NOT eventually be overcome by the parameters of the game, unless he somehow convinces himself that this is his inevitable outcome. Trading is not gambling where the house has the edge; trading is a performance based activity that requires skill, technique, experience, and practice. Most important though, the trader must have the right attitude, focus, patience, and self-confidence, and then the trader will be the one who possesses the edge.