maximize the probability of success in trading

Maximizing the Probability of Success in Trading was written by Beastlyorion, crypto trader and educator, and it’s included in issue #10 of 21Cryptos Magazine. To read more articles like this subscribe today. To read other free articles check out our Magazine category. Follow us on Instagram, Facebook and LinkedIn.

This article is from an earlier date and as such can contain figures that were actual at time of writing.

At first glance, outsiders might say our job as traders is a simple one. We choose to buy when we think an asset is going to increase in value, and we sell when we think it will decrease.

If we are looking at fundamentals we might investigate a project’s deadlines, its team, and its vision. If we are looking at the technical side of things the focus would be on the price action. Is its value increasing steadily over time? Is the price stabilizing and reversing momentum after a large fall? In hindsight, everything seems so simple. We should have bought here, we should have sold there. So why is it that we fail so often? How is it that so many fail so drastically that they choose to throw in the towel or even manage to run completely out of funds, effectively washing themselves out of the market? Maybe trading isn’t so simple after all. Perhaps there is more to it than meets the eye.

Choosing when to buy and sell might be the final decision that we make, but that’s just the tip of the iceberg. Each decision isn’t as simple as just choosing to buy or sell. It’s about maximizing the probability of success and profitability, while minimizing risk.

With more focus on risk management, we can ensure within reasonable doubt that we will never be wiped out of the market and never suffer unsustainable losses.

To make matters worse, we’re all human and subject to emotions that keep us from making rational decisions while trading. This is especially noticeable in newcomers to the market.

Inexperienced traders tend to latch onto their first feeling of success and run with it. They make one good trade and all of a sudden feel as if they’ve cracked the code to understanding the market and can make any trade succeed. They are so focused on maximizing profitability that they miss the other important components of a successful strategy. They’re concerned that they are not positioned to make more money than is possible anywhere else. They’d be willing to take big losses if it means that one day they can hit the motherload. This leads them to over-risk and exposes them to heavy losses. Maybe at first, they succeed, but over time they are doomed to their risk and probability of failure.

The process of becoming overconfident and taking your first losses is an important lesson. It is more of a rite of passage than a barrier to entry.

The part that separates the winners from the losers is the humility to reflect on what went wrong and the determination to change it and try again. The best traders reassess their strategy after a loss and adjust it before their next trade.

Eventually, they begin to see that the preservation of wealth and risk management are more important than profitability. They might make 100x returns, but if they lose it all on the next five trades then what’s the point? It would be better to make a few percent at a time and steadily increase their portfolio balance than endure large fluctuations. For many, it’s a difficult battle to overcome their emotions while trading. One of the key parts to being able to do this is separating yourself from the money you are risking. When you stop caring emotionally about how much you make or lose, you open up your decisions to rational thought, which allows you to evolve your strategy.

This stage of exposing weakness and adapting your strategy is a long one. Eventually, I hope that maybe I will be able to graduate from this stage myself. I think though, that I’m addicted to the process of self-improvement. Becoming better at what we do and improving who we are as persons until we are where we want to be is just how we evolve in life.

The thing that drew me to trading in the first place wasn’t necessarily the money but rather the challenge of beating the odds. In that way, it’s addicting for the same reason that gambling is addicting. At least in trading, we can have an edge against our opponents.