Trading Psychology: Understanding That High Probability Doesn’t Mean Certainty

Everyone one of us would love it if all of our trades were winning trades, but we know that won’t happen. We all think that if a trade has lost money, it was a bad trade. We try to find where we went wrong. I lost money therefore I did something wrong. Are all losing trades bad trades? No.


No matter how well you execute your trade, there will always be a losing trade because we are playing with probability. Trading is in part based off the probability. This means that sometimes we get what we want and sometimes we don’t.


The Certainty Trap


Ben Carlson wrote an article where he discussed the differences between probability and certainty.

“There are two arguments that I see on a regular basis that shows up as a result of data overload:


…….. because that’s never happened before it won’t happen ever


…….. because that’s what’s always happened before it will continue to do so


The problem with thinking like this is that it can lead you to fall into a certainty trap. Its an all or nothing kind of thinking that causes so many of us to constantly attach extremes to every single market move or data point we see. The assumption is that we are always either at a top or a bottom when most of the time the markets are probably somewhere in the middle.


The reason the investing certainty trap is so easy to fall for is because historical data can make you feel safe and reassuring. “Look here, my data says this has never/always happened in the past, surely this trend will continue so I will just sit here and wait for the profits to start rolling in.”


“Never” and “always” don’t have a place in the market because no one really knows what’s going to happen. “Most of the time” is a much more reasonable goal because nothing works forever, if it did then everyone would be using the exact same thing and making money off it.


To disregard the potential for the unexpected is the pinnacle of arrogance and is rarely rewarded long-term in the ever-changing markets. This doesn’t mean that you shouldn’t take on high probability trades based on the weight of historical evidence and your views. But probabilities consider the fact that there’s always a possibility that we might see the minority situation occur.


“It’s better to be roughly right than precisely wrong.”


It is very important to understand the difference between probability and certainty. Nothing is certain in trading. However, if something happened 80% of the time, there is a good chance it will happen again.


  • Ryan Mowatt, The Performance Coach

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