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 reflect upon and question 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 what I’m about to express. 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. 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.

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 C A N ’ 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 that sequence 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 B U T 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 N O T 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 talk, 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. Nothing should be accepted at face value. Any idea should be subjected to scrutiny, even my own. And I’m very open to it.

2. 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.

3. 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 a 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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  • Great post Yvan! a traders wins/loss is a random variable. The probability associated with each one of them better follow a distribution with an EXPECTANCY that is positive! One can have more losses than wins but what is the payout? Also one other thing to consider is that probabilities or expectancy work out with LARGE SAMPLE sizes. So the more trades one takes exactly has the system calls for, the more one should help to have a distribution of win/loss that gets closer to the expected win/loss rate.

    • Hey, thanks for your comment 🙂

      Here’s the way I see it: There’s always a mathematical trade-off in trading, and so for an expectancy to be positive over x number of trades:

      1. You have to trade a strategy where your losses are smaller on average than your wins. But the bigger the wins are, the lower the win percentage and so the higher the likelihood of getting losses in a row, and also, the more samples you need to confirm the viability of your system.

      2. You could also trade a strategy where your losses are bigger on average than your wins, but your win percentage has to increase for the strategy to be viable and the expectancy to remain positive. This equals a higher likelihood of hitting wins in a row. Also the less samples you need to confirm the viability of the system.

      Given what I just expressed, I just can’t see where the random distribution comes in. All I can see is a probabilistic distribution of outcomes. But I might be missing something so please do challenge my views 🙂

      • in fact, the option trading strategy i trade is a mean reversion and act more like 2. I think he used the random distribution to mean that your wins and losses are random variables. The outcome is a random variable but their distribution is not random

  • RAJ

    Hi Yvan! Thanks for arousing in us the need to question our belief systems.

    I would like to look at it in two parts.

    The first part is the outcome of any single trade which I believe is random in nature. It could move either side. Whatever system of trading we follow we have just no control over it. And that is the only reason why we apply stop loss. This is justified when we say that even the best of the trading system will have a win lose ratio of 50:50 or 60:40 in terms of no of trades. And secondly, we cut our losses faster.

    The other part is the expectancy of the quantum of run up of a trade. This is where we aim to have an edge. The trading system enables us to precisely catch a trade which has an expectancy of a good run up, provided we get the direction right. The expectancy could be a targeted one or a non-targeted one depending on the trading system. This is where we try to establish a probability, which is of a trade throwing up good return (and not of outcome). If the probability is higher, we adopt that system.

    Hence, a successful trading system is the one, where the return on a winning trade is much higher than you give up on a losing trade.

    • Raj, thanks for your comment and thanks for some well expressed thoughts. At face value, what you’re saying does make sense but my problem is this: What about traders who risk 3 to make 1? Such an approach requires a higher win percentage on average, so we can’t talk about a random distribution of outcomes there. If we believe that, then this implies that the strategy non-viable over the long run. Is that right or am I missing something?

      • Lets see…i think we are confusing two things. I was a stat major before trading.
        The outcomes and the factors that affect a trading system are random variables. Thats very important to understand and that is why there is risk when trading. However the distribution of the outcomes (win, loss) can be random but for you to have an edge it better not be random and you need a positive expectancy. You need BOTH. An edge + Positive Expectancy. Once you understand that, you see why it is super important to apply yourself to execute YOUR PLAN as your EDGE is thin. You also need to apply your money management so your EXPECTANCY plays out.

        In fact, I trade a system R-butterfly (my own) that risk more than makes per trade and yet, I have been consistently 30%+ each year. You see sometimes, if your loss is too small, you end up cutting a trade that could be a winner. The key is to FULLY BACKTEST YOUR SYSTEM and see whether you have the positive expectancy.

        Now…for a system to be profitable, you can have a risk of 3 to 1 and still come ahead. it simply depends on the occurances of your wins vs losses.
        lets say we define a variable X for the outcome of your trade. X can be =0 (loss), = 1(win) , 2= breakeven
        Then you need to assign to each the probability of each occuring and then the reward and loss for each outcome/
        If you win rate = .7, breakeven rate = .1 and loss rate = .2 and your average win is 15%, loss = 30%.

        • Thank you my friend. You’ve explained it much better than I have. I’m in total agreement with you.

      • RAJ

        The outcome is still random even if we talk about traders taking a risk of 3:1. How the higher win percentage is arrived at is like this. Suppose I target 10 points from my entry, the probability of it touching the target is high. If I keep a target of 20 points, the probability will be a little lower, and so on. It means that the target and probability are inversely related. The closer the target is from the entry higher is the probability of achieving it and vice versa. So it is up to each individual as to how he wants to trade on this scale of probability. So the distribution is random, but the scale on which we are going to use it will determine the win percentage. The system should be tested to see what the probability at the breakeven level is. I am only writing this from my little understanding of trading till now and not based on any statistical or an established theoretical approach.

        • Hey Raj, thanks. Well if the win% is higher as a result of having your target closer to entry point and your stop loss farther from entry point, how can there be a random distribution? If you’re trading such a system and there is indeed a random distribution of outcome, then the system is non-viable. I keep hitting this barrier in my understanding of the issue.

  • Miad

    I always disliked the idea of randomness in trading outcomes, and I never gave in to random outcomes. This post is revealing and in a way confirming . Ty

  • stuart see

    Yvan, your article has really struck a chord with my long standing thoughts about random distribution, which brings me to the subject of probabilities and eventually prediction if you would allow me to indulge. Those on the public domain, who have supposedly paid their dues, talk about their hard earned ability to identify high probability trades that gives them an edge that aspiring traders do not have – the operative word here being “high probability”. If this holds true, then the distribution is skewed towards wins and therefore cannot be random. Whilst, I have no problems with such claims, the point that I struggle with and detest is their denial about prediction, which seems to be a taboo word in trading. Surely, if their system/strategy supported by stats, is bias towards winning trades, they are essentially predicting positive outcomes. Without this bias, these traders with edge would not be successful despite having some losers. I just wish that these supposedly elite traders (often with stinking attitudes) would not brainwash newbies to believe that they have the ability to be consistently profitable but in the same breath they say, “anything can happen”. It is confusing to those seriously trying to cut their teeth in this business and build confidence. I can only think that they do not want to be caught out being wrong whilst fleecing desperate newbies of their money to hedge their bad trades. I just wish that the more experienced traders would drop their sense of elitism as we are all in the same boat. As if a new trader’s journey isn’t already hard enough. I take my hat off to you for being as open as you are. Look forward to the rest of the brainwashed series!

    • Stuart, thanks for reading, I appreciate it. And thanks for sharing your thoughts as well. I see what you’re saying and I completely agree with you.

  • Angus

    lol, I say bullshit. The guy probably doesn’t even trade.

    • You’ve got me all figured out, haven’t you…