In a world of chances, Probability is the KingThe Uncertainty and Probability in Trading
In a world where uncertainty reigns and the future is always unknown, trading becomes a realm where probability plays a crucial role. Throughout history, no one has been able to predict the future of financial markets with complete accuracy. This uncertainty is inseparable from trading, as we can never fully anticipate market movements.
Uncertainty is necessary in trading, as it is the origin of opportunities. Each trader may have a different view of the market, creating a balance between buyers and sellers, thus generating the possibility of closing deals.
Recognizing uncertainty allows us to enter a world of probabilities. We understand that no tool enables us to accurately predict the future value of an asset. Therefore, each operation carried out in the market has an expected success rate that is never 100%. Any unexpected event, such as relevant news or surprising economic data, can alter market conditions and turn an apparently perfect trade into a loss.
Uncertainty, therefore, is the foundation upon which trading is built. If it were possible to predict the future with absolute certainty, risk would disappear, and any trader would take every possible trade, becoming the richest person in history. However, in the real world, we know that success in trading is based on understanding and managing uncertainty.
Probability in Trading:
Probability in trading can be understood as the frequency of our successes. That is, the number of successful trades relative to the total number of trades made. Any trading system, no matter how sophisticated, is subject to successes and failures. Therefore, the most we can do is assign each trader an expected percentage of successes, understanding that there is always the possibility of loss due to the constant presence of uncertainty.
In previous post , I have explained how uncertainty leads to risk, thanks to the quantification of return dispersion. Now, we are in a position to intertwine uncertainty, probability, and risk and better understand the nature of trading. This is a world where success is not guaranteed, but where risks can be managed intelligently. Ultimately, accepting uncertainty allows us to make informed decisions and maximize our chances of success by managing our risk, all in such a volatile and uncertain field as trading.
In summary, probability is the king of a kingdom where risk is the queen, both becoming the two fundamental pillars of any successful trading system, whether done consciously or unknowingly.
King and Queen in the world of uncertainty. Recognizing their influence allows us to manage them and navigate better in this world of opportunities and risks.
Long live the King!
