Long Posts

Brain-washed series: Random distribution of outcomes

Brainwashed series part 1

Humans have an innate need to conform or to blindly believe in certain things just because other fellow humans believe those things, even if what is believed is, in fact, unfounded or blatantly untrue.

The reason is inherently evolutionary at its core, so I’m not saying that some people are immune to this phenomenon (like myself, for instance, since I’m talking about this issue). We are all subjected to this mode of thinking (and behaving) and to varying degrees, whether we are conscious of it, or not. We, humans, are hardwired for what is at heart a form of tribalism.

Tribalism is everywhere, protecting us by readily overriding reason and critical thinking, and pretty much anything else that could dim our chances of survival. In trading, the manifestations of tribalism are numerous – one of them being the polarized way in which most of us seem to accept so many things on insufficient evidence, just because those ideas come from “authorities” and they’re believed by so many to be absolute truths.

And the incredible irony is that, in turn, we begin to make these arguments ourselves — we claim to “know” things about the markets and about trading, even though we haven’t tested these ideas, and this automatically closes our minds to views that conflict with ours.


Dispelling some myths

So, in this 10 part series called Brainwashed, I will attempt to share ideas that are often passed around without being questioned, and I’ll offer some counter-arguments. The goal isn’t to discredit anyone and to appear like “I know better”. I just want you to question and reflect on certain things before you accept them as core beliefs. That’s what I’m doing with this blog post series.

So, see if you’re in agreement with me, or not. And why. If you don’t agree, don’t hesitate to share your reasons in the comment section. Don’t let me dwell in my ignorance… please. Of course, if ignorance there is

A very common one

Today, let’s look at a very common idea which is this one:

“There is random distribution between wins and losses for any given set of variables that defines an edge.”

That’s a big one and I see it thrown around all the time. The saying is originally from Mark Douglas but since it’s often read out of context, I often see its real meaning get lost.

Think about it: If you read charts; if you do analysis and trade a technical based trading system, you must believe in some way that there is an edge to be found in the markets. If you trade in accordance with that belief, then there CAN’T be a random distribution of the outcomes of your trades.

Just because you don’t know for sure what the sequence of wins and losses will be, that doesn’t make it random.

Again, if you believe there is an edge to be found, then a “probabilistic distribution” would be the more accurate term to use — you don’t know for sure what the outcome will be on any particular trade BUT you have good reasons to believe that it has a higher chance to be something specific. Furthermore, you have a pretty good idea of what it will be over a set number of trades.

Expressed differently, on a trade by trade basis anything could show up BUT there is a higher chance of one thing showing up over the other… And that, my friends, is NOT what randomness is!

This might just be a simple semantic difference to you but I think it’s very important to choose wisely our words so that it doesn’t create confusion in ourselves, first, and in others, second.

Question everything!

Most of human cognition happens under the hood of conscious awareness, and it’s driven not so much by the goal of getting better at trading (or winning in the long-run) as it is, first, to survive. And so, because of this, we may not be fully aware (at the conscious level) of the influence tribalistic thinking has on us.

This ultimate imperative dominates so much of how we think, feel, and therefore behave that it’s hardly surprising that the more unsettled and uncertain we feel about the markets and our ability to navigate it, the more we look for the guidance of so-called market gurus who claim to have all the answers. The more we find comfort in sayings (mostly platitudes or words taken out of context), looking to the tribe to keep us safe.

I’m no guru and I don’t want you to accept blindly what I tell you. That is not the point. And if you think carefully, you’ll see that this is not the point of trading as well. The point of trading is this: The more you question the ideas that are thrown at you and the more you test them, the better you are.

So go ahead and question, my friends. Question everything!

See you next time for part 2.


This post has generated a lot of talks, and I’m glad it did. A lot of you have sent me private messages pointing out the flaws in my thinking and I want to clarify my views as much as possible.

1. I’m not trying to discredit Mark Douglas and his work. I’m a big fan of his, I think his books are the best trading psychology books out there, hands down.

2. As compelling as his ideas were, nothing should be accepted at face value. Any idea should be subjected to scrutiny, even my own. And I’m very open to it.

3. As said in the post, I’m just trying to offer food for thought while acknowledging that I might be wrong on this or my knowledge incomplete. I am a REAL trader, I don’t just discuss theoretics. I’m not even a math geek, I’m just discussing my own observations through placing and watching well over 5000 trades.

4. I want you to think very carefully about this: Just because you DON’T KNOW what the sequence of wins and losses will be, that doesn’t make the sequence itself randomly distributed. If you trade a system that includes some kind of asymmetric risk to reward parameter, the distribution has to be probabilistic despite you not knowing what will show up next. You not knowing an outcome doesn’t make that outcome random in nature.

For instance, if you trade a strategy with a win rate of 30%, then this means that on a trade by trade basis, ANYTHING could show up, it’s true, BUT you’re MORE LIKELY to get something that looks like this:
If your win rate is 30% on average and you’re reaping more losses on average on a trade by trade basis, this is NOT a random distribution of outcomes, it’s a PROBABILISTIC DISTRIBUTION. Remember, your win rate is 30% because you’re shooting for bigger rewards. The higher the reward you seek, the lower the win rate. That’s just a mathematical fact.

But can an outcome be randomly distributed? Yes, if you trade a system with win rate of about 50% and a R:R of 1:1, then on a trade by trade basis, the outcome WILL be randomly distributed. Now, maybe I’m missing something, and if I am, please educate me.

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I've been trading for a living since 2006. By merging mindfulness (an in-depth study of the mind and its tendencies in the present moment), a good trading process, and an efficient business practice, I went from being a losing trader to a consistently profitable one. Through my work here at Trading Composure, I aim at helping you do the same.
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