Naturally, people come into the markets to win trades and make money.
But one of the biggest ironies of trading is that those who focus on winning, don’t.
At least not for long.
Why? Let’s take a look…
How do we make money?
The answer is obvious: have winning trades.
Winning trades make money.
But how do we have winning trades?
The answer is: make good trading decisions.
Good decisions lead to winning trades.
So: Good decisions lead to winning trades, which makes us money.
This is pretty intuitive. Nothing new here.
Do good decisions always lead to winning trades?
This is where things get a little tricky… because you can make the right decision and still lose money on a trade.
But how can that be? Aren’t all winning trades the result of good decisions?
Well, no. They aren’t.
Decisions in the face of uncertainty
Let’s say there are two boxes in front of you. You can’t see into them.
You are told that the green box has 3 black marbles and 2 white marbles, while the blue box has 2 black marbles and 3 white marbles.
You must choose to pick up one marble from one of the boxes. And you can’t look into the box as you’re picking it up.
If you pick up a white marble, you win $100. If you pick up a black marble, you lose $100.
Which box would you choose to pick your marble from?
… you’d pick the blue box.
It’s simple – you have a better chance of picking a white marble from it.
But here’s the thing…
You could still end up picking a black marble, even though you made the right decision to pick from the blue box.
We can’t control randomness
This small example highlights the dilemma that many traders don’t even know they’re facing…
You can lose money when you make good decisions.
And just as ironic,
You can make money when you make bad decisions
Unfortunately, people tend to be much more excited and influenced by what they can physically see (i.e. outcomes of trades), compared to what they can’t (i.e. the probability of that outcome).
Why you shouldn’t focus on the money
You could certainly make money with bad decisions (due to luck), just like how you could randomly pick a white marble from the green box.
But as you keep picking marbles from the green box, over time you’ll be picking more black marbles and eventually lose money.
So if all you care about is making money, you could be making bad decisions, all the while thinking that you’re making good decisions, and lose money over time.
Making or losing money (at least initially) is not an accurate gauge of whether you’re making good decisions.
So what should you focus on?
Good decisions are the only way to make money trading in long run.
Bad decisions can help you make money in the short term, but your luck will eventually run out.
So instead of focusing on making money, focus instead on making good trading decisions.
What a ‘good decision’ looks like
In practice, the only good decision we can make is sticking to the rules of a strategy with an edge in the market.
The moment we stray from the rules, it’s a bad decision.
And that’s pretty much all there is to it.