A lot of traders think that they think in probabilities. But just because you think about odds and reward-to-risk doesn’t mean that you actually think in probabilities. One of the best quotes I’ve ever read on the subject comes from poker pro Annie Duke:
To be a great poker player you have to have what we call ‘a lot of heart’, which is the ability to not only understand what the right play is, but to be able to follow through with it. Which seems like a very trivial point, but it’s probably the biggest point. A lot of times, what happens to people, sort of what separates the good from the great is that the good know the right answer, but they don’t follow through with it because it’s too scary and they think the risk is too big. They don’t have that confidence that it’s okay because while there might be some variance to the play and you might lose this particular hand, mathematically it was the right choice. Over the long run it will work out. One of the things that I say to students is that most poker players spend far far too much time worrying about whether they have the best hand. What great players worry about is whether they can win the hand enough of the time, which is a totally different way to think. What really makes a great poker player is understanding, it’s not about winning right now, it’s about making the right decisions so that you win in the long run.
Let’s convert that poker quote to the world of trading. As you see, the parallels are very striking:
To be a great trader you have to have what we call ‘a lot of heart’, which is the ability to not only understand what the right entry or exit is, but to be able to follow through with it. Which seems like a very trivial point, but it’s probably the biggest point. A lot of times, what happens to people, sort of what separates the good from the great is that the good know the right answer, but they don’t follow through with it because it’s too scary and they think the risk is too big. They don’t have that confidence that it’s okay because while there might be some variance to the results and you might lose on this particular trade, mathematically it was the right choice. Over the long run it will work out. One of the things that I say to students is that most traders spend far far too much time worrying about whether they’re right on this particular trade. What great traders worry about is whether their action will give them a profit enough of the time, which is a totally different way to think. What really makes a great trader is understanding, it’s not about winning right now, it’s about making the right decisions so that you win in the long run.
Now you know what it really means to think in probabilities.
