The fallacy of "right and wrong"

[new_trader]

[edit]

It's true that a discretionary or intuitive trader is exercising judgement and quite clearly, in common parlance, that judgement can be right or wrong. It's also true, however, that being right or wrong is only of passing interest to good traders and nothing that gets their emotional juices flowing one way or the other.

good trading

jon

Precisely Jon. Well said.

 

[Jaydee]

You are wrong about not caring if an individual trade is a winner or loser because caring about doing the right thing at every opportunity means s/he cares a great deal about individual trades.

Hi new_trader

I agree with what you say here but I think I haven't explained myself well enough. What I'm talking about regarding winning and losing is this:

When you put on a trade, you can't know with any certainty that it will go the right direction for you. However, you make a choice which is consistent with the experience and the method that you use.

Let's say you are anticipating a price break: You gain an exceptionally good short position from the entry which gives you the confidence to keep your risk tight. As soon as you enter, the trade goes your way - it breaks the price you thought it would but not enough to gain momentum and push on. Consequently, the price bounces and you are stopped out.

Was it a bad trade? I don't think so and here's why:

The price had as much of a chance to break as it did bounce (50:50 - I know you can't quantify these things but for the purpose of my arguement I have to make some assumptions). If you had been right you would have run the trade for all it was worth. If you were wrong you would lose 5 ticks. So, if a similar opportunity comes up again and again, assuming you trade it the same way every time, you should make money in the long run. Therefore, my point is that just because the price bounced rather than broke had nothing to do with your analysis, it was to do with chance.

I agree entirely with your point about questioning whether the trade was a good one or not through asking:

Did I get good position on the entry and was it consistent with my methods?
Was my stop too tight/loose or just right in the case of losing?
Did I leave money on the table in the case of winning?

If the answer to these questions is positive, then the concept of either winning the trade or losing it was down to chance, not the trader - they did everything they could.

Take a 80:20 situation (once again, I know you can't easily quantify these), 20 of the same/similar trades out of 100 are going to be losers. So the right thing to do is lose on 20 of these trades (such is the counterintuitive nature of trading) because if you chop and change your method and go the other way, you'll end up being wrong most of the time.

So, my point was, you should care about doing the right thing, relative to the three questions I posted above. If you did do the right thing, you shouldn't care whether you won or lost on an individual trade. This is a game of uncertainty and,consequently, there is a lot of chance involved. As barjon said, 'it's about maximising advantage and minimising disadvantage' - I'd like to put it another way, it's about getting the most from your trade when you are lucky (right) and getting out quick when you realise you are unlucky (wrong). That is doing the right thing which is completely different from being right.

 

[Paul71]

The two words that irritate me on these boards are "right" and "wrong". We have people parading that they were "right" when a call they made moves in the desired direction; others who bemoan that they were "wrong" when it doesn't; others who bemoan that they were "wrong" only to be proved "right" later on (usually when their stop has been taken out); and still others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money.

In my experience most good traders do not think in such terms. They trade what they see not what they think and merely react to unfolding price action, both in taking a trade and in managing that trade thereafter. They know that the market is uncertain, as is the future, so it's simply not a question of "right or wrong" - it's a question of maximising advantage and minimising disadvantage.

mmm, got that out of my system

good trading

jon

I understand what you are saying Jon and i agree with you. What is an advantage and what is a disadvantage?

If a trader is only getting 30-40% of thier trades 'right' and still making it pay, what is thier advantage?

Is there something in these figures that just doesn't ring true for the garden variety SBer that trades higher TFs?

It doesn't add up, think about it.

An edge incorporates 'right and wrong', money management is not an edge, but it can be applied right or wrong, but if a trader is using an incorrect MM plan then they don't have an edge anyway and thier efforts are doomed.

Is an edge black, white or shades of grey? Right or wrong?

 

[Paul71]

The fallacy of right and wrong is just that, right principles traded the wrong way, a nasty tasting trading soup, cooked up by the worst wannabee trading chefs.

I think we've all been there.

There's trading and then there's investing....then there's limbo land, a world of TA and indicators.

 

[new_trader]

Important question!

Is an edge black, white or shades of grey? Right or wrong?

A very good question. An edge is one of those things where nobody can tell you if you have one, or if it's permanent, you have to know it yourself (A bit like the way the Oracle talks about being in love and being "The One" in the movie The Matrix). Things become absolutely black & white when you know. But it's only after you've gone through the process; the angst, the blood, the sweat and the tears that you will be able to answer the question honestly. During the process you will narrow down right and wrong into two parts. 1) What you ought to be doing and 2) What you ought not to be doing. After hitting your margin a further 2, 3, 4 times, you are left with only one thing 1) What you ought to be doing and nothing else. The fog has cleared, you are trading.