Think in Probabilities Embracing Uncertainty Your Key To SuccessPicture this: You’re at your trading desk, eyes on the charts, heart pounding as the market swings unpredictably. Do you feel that fear creeping in?
Now, imagine knowing that this unpredictability doesn’t have to scare you. Instead, it can be the key to your success. Let's dive into why thinking in probabilities and staying calm in the face of uncertainty can turn trading from a gamble into a calculated path to consistent success.
Many traders struggle with uncertainty because they lack a solid, tested system. Trading randomly or without a proven strategy leads to anxiety and inconsistency. But once you have a reliable system that suits your lifestyle and mindset, and you fully understand your edge, you realize that while the outcome of each trade is random, the probabilities of your trading system will work out for you over time.
The Role of Probabilities in Trading
Trading isn’t about predicting the next big market move; it’s about understanding the odds and working them to your advantage. Each trade is a small part of a larger statistical framework, where the focus shifts from individual outcomes to the bigger picture.
Why Is Learning To Think In Probabilities So Important For Trading Success?
Reduces Emotional Bias : By thinking in probabilities, you understand that each trade is just one in a series of many. This helps reduce emotional reactions to individual losses or gains, such as revenge trading, doubling up on position sizing, or even smashing your new iPhone against the wall (been there, LOL).
For example, if you know that your strategy wins 60% of the time, you won't be devastated by a single loss. You'll see it as part of the statistical outcome.
Encourages Rational Decision-Making: Knowing your strategy has an actual edge helps you stick to your plan, even during losing streaks, and avoid impulsive decisions. To know your edge, you need to do plenty of backtesting and forward testing so you can gain confidence in the system.
For instance, if you experience a string of losses, understanding that this is normal and statistically probable helps you remain disciplined and not deviate from your strategy.
Builds Confidence in Your System : Confidence comes from knowing your strategy is backtested and has a proven edge over a large number of trades.
This knowledge helps you stay disciplined and focused on executing your plan. For example, if your backtesting shows a positive expectancy over 1,000 trades, you can trust your system even when short-term results are unfavorable.
Things That Have Helped Me Over the Years to Deal With the Uncertainty of Trading
Finding or Developing a System/Strategy That Suits You : As humans, we are all different, and this is especially true in trading. Some people are happy to be in and out of the market fast (scalpers) and have the ability to make big decisions quickly under pressure.
Others are slower thinkers and like to make decisions carefully, staying in the market for a longer period of time (swing traders).
You need to find what you're best at and stick to it. If you have a busy life with work and family, maybe swing trading suits you. If you’re younger and not as busy, then perhaps scalping is your style.
Playing Strategy Games and Games of Chance : This may not be something you've heard before, but I've met many traders, including myself, who have found that games like poker can really help your trading by teaching you to think in probabilities.
Another game I love to play is chess, as it encourages you to think ahead, and I’ve found it has helped me in my trading over the years.
Practicing Visualization : If you've ever read anything on the subconscious mind, you know it’s responsible for 95% of all your automatic behaviors, especially in trading. The subconscious doesn’t distinguish between what is real and what is imagined.
This is why visualization is such a powerful tool to help you embrace market uncertainty. By visualizing yourself placing trades confidently, managing risks well, and handling outcomes calmly, you prepare your mind for real trading scenarios.
This mental practice reinforces your belief in your system and prepares you for the market's ups and downs.
Books That Helped Me Think in Probabilities
Reading has been an invaluable part of my journey to understanding probabilities. Here are some books that have profoundly impacted my trading mindset:
"Thinking, Fast and Slow" by Daniel Kahneman
This book helped me understand how cognitive biases affect decision-making and how to overcome them by thinking more strategically.
"Fooled by Randomness" by Nassim Nicholas Taleb
Taleb's insights into the role of chance and randomness in our lives and the markets were eye-opening and changed how I view risk and probability.
"Beat the Dealer" by Edward O. Thorp
Although this book is about blackjack, Thorp’s exploration of probability and statistics offers valuable lessons for trading.
"The Theory of Poker" by David Sklansky
Sklansky breaks down the mathematics of poker, showing how to make decisions based on probability, a skill directly applicable to trading.
"The Intelligent Investor" by Benjamin Graham
This classic on value investing emphasizes the importance of long-term thinking and understanding market probabilities.
"A Man for All Markets" by Edward O. Thorp
This autobiography offers a fascinating look at how Thorp applied probability theory to beat the casino and the stock market.
"Sapiens: A Brief History of Humankind" by Yuval Noah Harari
Harari’s book provides context on human behavior and decision-making, offering insights into the psychological elements of trading.
"The Signal and the Noise" by Nate Silver
Silver’s exploration of how we can better understand predictions and probabilities is highly relevant to making informed trading decisions.
"Superforecasting: The Art and Science of Prediction" by Philip E. Tetlock and Dan M. Gardner
This book teaches how to improve forecasting skills through careful analysis and thinking in probabilities.
Thinking in probabilities was a game-changer for me. It shifted my focus from trying to predict every market move to playing the long game. By embracing this mindset, I turned fear into confidence and uncertainty into strategy.
Remember, trading isn’t about guessing the market. It’s about responding with a clear, composed mind. Trust your strategy, know your edge, and let the probabilities work in your favor. This approach transformed my trading journey, and it can do the same for you. Happy trading!
Uncertainty
Bitcoin - Probabilistic MapSince traders are literally made of particles, it's vital to know the principles of their behavior in micro scale. Some people even use planetary cycles to implement into charting. But I believe the answer is deep in quantum world of probabilities - the fabric of reality itself.
Reference to Quantum Mechanics
The universe itself prohibits 100% prediction accuracy. This is called Heisenberg Uncertainty Principle, and it's the fundamental building blocks of Quantum Mechanics. In order to predict particles behavior, all you need are just 2 quantities/data/features:
1) Position of the particle
2) Momentum of the particles.
If you know it's position and it's momentum, you can easily predict it's trajectory. So if you have position and momentum data of all particles in the universe, and you have unlimited computational power, you can predict their behavior (interaction, movement, etc.), and basically predict the future (stock market, weather, natural disaster, etc).
However, the Heisenberg Uncertainty Principle states that it is impossible to collect information of particles's position and momentum with 100% certainty. The more certain you know about particle's position, the less certain it's momentum" and vice versa.
So if somehow with the unlimited computational power you can predict particle's position at time with 100% accuracy, then your prediction error for its velocity will be infinity, which prevent you for making accurate further predictions, rendering your model useless.
Hence, it's theoretically impossible to make 100% accurate prediction even with unlimited data and unlimited computational power.
So Is The Universe deterministic or probabilistic?
100% prediction accuracy also means the universe is deterministic - there's only one possible outcome of the future. Einstein was on this side, citing "God doesn't play with dice". On the other hand, folks like Heisenberg, Max Born, Schrodinger, Oppenheimer, etc.., the founding fathers of Quantum Mechanics, viewed the future as set of possible outcomes each having it's own probability.
Since market couldn't care less about anyone's subjective forecasts, I do predictions solely based on historic price dynamics in macro scale to stay objective and true with the market pulse rather than be bared with my endless interpretations of patterns. I don't need my consciousness to interpret because we already have a data derived from collective consciousnesses to work with. Chart is already a reflection of reality that captures the emotions of participants. In other words, it's a time fractal that exposes the essence of the market across timeframes. In turn the market itself is a function of trading time . These basis justify linking systematic fragments of cycles to work out the capacity of price action. Basically in Fractal Analysis, the question is how can direct metrics of the historic waves geometrically explain current and future price levels.
The Fibonacci sequence is a mathematical concept that appears in various aspects of nature. This connection between mathematics and the natural world is a fascinating example of how patterns and structures found in abstract concepts like numbers can manifest in physical reality . Particularly, using Golden Ratio as a key rule that governs order in chaos.
In TradingView, the "Fibonacci Channels" is a great tool to capture the waves (domestic certainty) and turn them into a probabilistic interconnected structure that captures the uncertainty of the market - the entanglement of price action.
To start with it's vital to use log scale where percentages are equally captured in distances. So a 100% a growth, say a vertical distance from $40 to $80 measures the same distance as from $1000 to $2000. Besides, percentages are what drives people to feel emotions which affect market behavior (collective executions). Finding geometric relationship between waves, the use of log scale is a must.
As I've done this before I want to show how market deviates near fibs.
A Direction of 2013 HIGH ⇨ 2017 HIGH with bottom of 2011 gives next bottom 2015 at 0.618 after -86% drop.
And also predicts the COVID bottom in 2019 after -72% drop as well as current level where price has cooled down locally.
We can note that previous ATHs are explained with logarithmic curve.
That's why we'd need another fib channel to connect 2017 HIGH ⇨ 2021 HIGH direction with previous bottom of -86% drop in 2015. FC of that direction predicts bottoms of 2018 (-84%) and covid 2019 (-72%) at 0.618 again.
Together they produce an interference pattern covers significant historic price changes.
To further interpret current levels though the chart itself, we can use line with angle of direction connecting 2021 double tops:
This shows the capacity of how high the market might still grow before next significant correction, if the local fib to the price hasn't yet dimmed the bullish incentive.
Another straight line can be used to connect 2019 COVID LOW (-72%) with 2022 LOW, because we might probably never see such price levels in the nearest future as price has broken out with high rate of change.
Now it needs more time and bearish capacity to go there. This line can indicate the bottom of hypothetical correction, if it happens now. Other than that it's a clear trendline with almost 4Y wavelength.
Since straight lines doesn't exist in nature, I didn't extend them to the right. Now we need a more adaptive version of it to connect recent local bottoms of the trend.
That would be a logarithmic trendline, in other words curves to mimic the function of exponential growth. Therefore falling below it, might indicate a possibility of correction and even reversal. Each day if it fails to grow with the curve, the bears will get depleted. A cross below the logarithmic curve of spreading information would be a confirmation of new bearish incentive. This is simply done to work out boundaries as limits of the function that explains the market.
Corrective wave has a timing of 15 days in respect to its domestic volatility properties, before it becomes bearish impulsive or continues the impulsive bullish wave.
Curves as a function of trading time explain pretty much all historic bullrun growths.
As if there is some kind of gravity that governs the trend or it's the PriceTime that curves with the emerging trend.
Individual cycles can be too curved accordingly.
So the more the price fails to break out that function, the more predictive curve becomes.
Trading Psychology 101 | FEAR (1/2)A bit of a different video for you..
Thought i should talk about a sensitive subject here..
Psychology in trading and the key factors that you may need to finally BECOME a better trader..
In this part, I talk about FEAR and FOMO. Also, I added a more sensitive part, which is feeling burnt out and ways to overcome that.
Hope you find this helpful!
Why doesn't technical analysis "always" work?A technical indicator could give a buy signal for a security with one set of values, and at the same time, could give a sell signal for the same security with a different set of values! How do you trust the indicators then?! Moreover, if a set of values works this time, the same set of values may not work the next time!
Technical analysis uses historical movements of a security to predict a probabilistic future direction or price of the security. By definition, technical analysis is probabilistic and thus its predictions are correct sometimes and go wrong other times. And we are aware of this uncertainty and are perfectly fine with it!. However, it is not possible for an indicator to describe the accuracy of its prediction. In the absence of that, basing our trade calls blindly on such predictions is as good as basing them on coin toss results. This article examines ways to assign an accuracy number to the predictions made.
Given this problem statement, the first thing that comes to our mind is backtesting. The results of backtesting give an indication of how an indicator has fared in the past. It is important to note that backtesting shows different results if applied to different timeframes (between two dates) or with different sets of values based on market behavior of that period. Our goal then is to know which set of values of all possibilities best suits a technical indicator for a given security for the current market conditions.
We all know that the price of a security doesn't move in a straight line! It keeps moving in a wavy pattern making highs (crests) and lows (troughs), both of short and long forms. Not only does the price change, but also the frequency and period (distance between crests and troughs, or swing highs and lows) of the security change on a day to day basis! This dynamic period plays a crucial role in selecting values for indicator parameters. For, e.g., it would be inappropriate to choose a longer length moving average when the security is volatile and making shorter swings. Also, the right set of parameters keep changing for an indicator with ever changing period of the security.
Without going into the complexities of establishing relationships between period and indicator parameters, we could backtest indicators for all possible values to arrive at the best set to use. For simplicity, let us consider a strategy that gives a buy signal if slope of the simple moving average is positive and sell signal if the slope turns negative. All that this takes is a single parameter - length of bars to the past (moving average length). Let us backtest with different lengths of and plot P&L for each with probabilities based on the number of trades won. The length with the best P&L could be considered as the ideal parameter. Note from the chart how this changes over time. Note also that this changes based on backtesting lengths, the chart uses 3-Jan-22 as the start date. (Another Note! Approximate P&L calculations with both long and short, for demonstration purposes only)
In summary, technical analysis methods work well with the right set of parameter values. And choosing the right set still has a lot of uncertainties to it, though the uncertainty could be reduced by backtesting and choosing a better set from time to time.
Things to Remember As the Market Dynamics ChangeA successful trader must be like a chameleon, willing to change with market conditions. Markets reflect the economic and geopolitical landscapes. The global pandemic changed many assumptions, forcing market participants to develop new skills to deal with the price carnage in early 2020. The impact of unprecedented central bank liquidity and government stimulus caused the need to pivot and adapt to new conditions.
Plan first- Trade or invest later
Risk-reward is critical
Leverage is a function of price variance
Stick to the game plan
There are always other opportunities in volatile markets
In early 2022, Russia’s invasion of Ukraine has turned the world upside down. The US, Europe, and allies worldwide support Ukraine by providing aid and slapping Russia with sanctions. However, the meeting between the Russian leader and Chinese President Xi at the Beijing Winter Olympics was a watershed event and may have set the stage for the incursion. China and Russia entered into a long-term $117 billion agreement for Russia to supply energy and other commodities to the world’s most populous country with the second-leading economy. The deal could make US and European sanctions toothless or lessen the bite on Russia’s economy as President Putin moves to take the former Soviet satellite back under his umbrella.
With the US, NATO, and other allies on one side and China, Russia, North Korea, and Iran on the other, the risk of a confrontation with nuclear ramifications dramatically increased. The pandemic has given way to a geopolitical crisis, requiring another pivot by investors and traders to deal with the current environment.
Volatility is likely to be the norm instead of the exception for the foreseeable future. The increasing price variance is a nightmare for passive investors but creates many opportunities for nimble traders with their fingers on the pulse of markets.
Success in markets always requires discipline, and increased volatility only makes discipline more critical. In early March 2022, we must remember the key factors that increase the odds of success in markets.
Plan first- Trade or invest later
Organization and planning are critical in life, and trading and investing are no exception. In a highly volatile market, planning becomes even more essential.
We follow three rules for considering any risk position:
Respect the market sentiment- The path of least resistance reflects market sentiment, making the trend your only friend in markets across all asset classes.
Write down your ideas, planning, organizing, and memorializing your thoughts. Referring back to the original justification for a trade or investment will remind you of the thought process.
Do not trade or invest for the sake of participating in any market. The risks in over-trading or investing without a plan increase with price volatility.
When considering entering any risk position, eliminate any emotional impulses by ignoring the news cycle and so-called “expert” advice. The price action is the most objective view of the market’s interpretation of the geopolitical and economic landscapes.
Risk-reward is critical
Any plan needs to outline the risk tolerance, which must be a function of profit targets. We follow three rules regarding risk versus reward:
The risk-reward equation should be at least 1:1, meaning do not risk more than your expected profit level.
Higher price variance should increase the expected reward level compared to the risk. Even the most successful traders call the market’s direction wrong more than right. A higher reward target versus risk increases the potential for success over time, allowing for small losses and higher profits.
Never increase the risk level because an asset price moves contrary to expectations. Admitting you are wrong can be humbling, but it is a critical element for financial survival.
Risk-reward is the essential part of a plan that establishes the discipline necessary for success. Risk-reward levels should always reflect price variance, and higher price volatility requires more expansive risk-reward levels.
Leverage is a function of price variance
Leverage can be a blessing or a curse. Greed and fear are impulses that drive human behavior.
Leverage levels should always reflect market volatility.
In volatile markets, reduce leverage to protect capital.
In static markets where volatility declines, increasing leverage is more appropriate.
When risk positions are in the money, greed drives us to feel we are not long or short enough. Fear makes us believe we are too long or short when they are out of the money. A plan and the appropriate leverage will help avoid listening to the little voice in our heads that incites the fear and greed impulses.
Stick to the game plan
Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.” Markets are not forgiving when they move against our expectations. Sticking to a game plan prepares you for the sock in the kisser.
The risk level should be set in stone at the beginning of any trade or investment.
It is acceptable to increase reward horizons when prices move in our favor.
A risk position is always long or short at the current price, not the execution price.
Assess risk at each price level and adjust levels accordingly.
Adjust risk levels using trailing stops when an asset’s price moves in the desired direction.
Never allow a profitable position to become a loser by expanding the original risk level. Protect capital by protecting profits and have the fortitude to take small losses by sticking to the original game plan. When prices move contrary to expectations, admit to yourself you were wrong. When prices move in your favor, do not allow greed to creep into the plan.
There are always other opportunities in volatile markets
Most traders or investors will miss many trades and investment opportunities. Do not despair! In volatile markets, there is always another opportunity right around the corner.
Markets reflect the geopolitical and economic landscapes. The dynamics have dramatically changed with Russia’s invasion of Ukraine. Elevated volatility in markets across all asset classes will be the norm, not the exception.
When approaching markets, do the work and write down a plan. Make sure it has a logical risk-reward balance that reflects price variance before executing a buy or sell order. Follow the rules by sticking to your plan. Eliminate fear and greed emotions by establishing comfortable risk-reward levels.
A successful approach to trading and investing requires a portfolio approach. No one trade or investment should determine overall results. There are no guarantees in any markets, but following rules, sticking to a plan, and eliminating emotions will improve your chances of long-term success.
Be careful in markets as the dynamics have changed.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
US Stock Markets: And what's Mueller got to do with you?!This screencast is speculative - and I invite the full brain power of Tradingview's community to consider the variables which might affect the US Stock Markets around this time. Let's do this together.
The stock market has retreated, probably due to nerves about the Mueller report - among several other things. If the report contains nothing on which Trump is impeachable then, I'm expecting a pump north.
Mueller's hit list so far has been :
1. PAUL MANAFORT
2. RICK GATES
3. MICHAEL COHEN
4. MICHAEL FLYNN
5. GEORGE PAPADOPOULOS
6. ALEX VAN DER ZWAAN
7. RICHARD PINEDO
(Names are in all caps only due to copy and pasting. Names and convictions are all in the public domain, so I'm not defaming anybody.)
Some may think that with so much dirt around it's unlikely that Trump will come out of this clean. Hey, this bull market is about Trump - let's not debate that. If Trump goes down the markets go down like lead balloons. Alternatively, if Trump comes out clean enough, expect bullish moves which may then be limited by other factors.
Separate to Mueller's investigation and report, there are 16 other investigations into Trump. If just one sticks, there could be catastrophic collapse of the American markets - with shock waves globally, hitting Forex as well.
We have other variables to consider :
1. The Fed 'money printing' press going to be turned up.
2. Bleaker than expected economic projections by the Fed and Draghi.
3. Expected weaker US Dollar - creating bullish pressure in the long term.
4. Flattening or inverted yield curves
5. Uncertainty's and delays on deals with China.
6. Potential Brexit shock waves.
7. Germany struggling against recession.
8. 'Housing' market bubbles in several countries including the US, in trouble.
9. US and Global debt totally out of control.
10 etc. .. and much more.
Sorry - I don't know what's gonna happen. I do not give tips on entry positions.
