“A winner’s mindset means learning how to think in probabilities” – Mark Douglas
To understand this quote, let’s understand a universal truth- The 80/20 Rule. Also known as the Pareto principle:
The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes- Wikipedia
Translating this to Work: 80% of your productivity comes from 20% of your effort.
Translating this Money: 80% of the money is owned by 20% people.
Translating this to Life: 80% of your happiness comes from 20% of the things you do
Translating this to Trading: 80% of your profits come from 20% of your trades
This being a universal truth, applies to everything we do, including our trades.
Just imagine yourself taking every trade with the understanding that out of every 100 trades that you take, only 20 trades will contribute to growing your account. That means, the rest 80 will have a couple of stop losses being triggered, a couple of breakeven trades and a couple of trades making a tiny profit, but nothing substantial to write home about. It’s only those 20 which will turn the account looking green and making big jumps going north.
How does this perspective change your expectation from the outcome of the trades that you take? Does your attitude towards trading start to shift a little bit?
Will you be upset if you had your stop loss being triggered 4 days in a row?
Will you get better at managing risk management on your account, knowing that losses are inevitable?
Will you spend more time back testing your strategy and understanding the accuracy and the risk to reward of your trading system?
In my experience, the answer to all the above questions is a big YES!
When you know that only 20% trades will be big winners, you won’t be upset seeing multiple losses. And now that you are expecting losses, it’s obvious you will budget these losses by risking a small percentage of your account. May be 1%, may be 2% or may be 0.5%, but you will definitely work on your risk management plan and understand your trading strategy better by fine tuning either the accuracy or the risk to reward ratio.
All this, because you understand that there is no trading strategy that guarantees profit or predicts the market and losses are inevitable, but how much you lose per trade is decided by you and not the market.
Let’s say that your strategy has an accuracy of just 30% and you take trades that offer you a risk to reward ratio of 1: 3 or more, with a risk of 1% per trade. After 100 trades: 70 go in a loss of 1% = -70% and 30 make a profit of 3%= 30* 3%= +90%. The net outcome is +20% growth of your trading account.
If you are an intraday trader and take 1 trade per day, which means 5 trades per week. That’s 100 trades in 20 weeks, Implying 5 months. That equals 20% growth of capital in 5 months, and 40% growth in 10 months summing up to 48% in a year. If you can do this consistently, you double your money in less than 2 years. Compounding the profits would take it to exponential growth in 5 years.
All this knowing that only 3 out of 10 trades will make money. But you do not know which 3 trades those would be. The first 3 or the last 3 or any 3 randomly spread out. That’s probability!
Once a trader learns to think like this, in terms of the chances of an outcome, emotions are in check and expectaions are easily met, and that’s what makes the difference between the 20% who make money and 80% who don’t, because they are upset with the loss or lost everything in a trades trying to predict the market.
That was an example of how I think in probabilities, and trust me it’s made me happier and definitely RICHER 😉
That’s my understanding of Mark Douglas’ quote: