Market odds
If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose. That’s a very important bottom line that all market practitioners must keep in mind. It has been formulated many times in market history… Note that’s it’s a bit more subtle than being contrarian. Indeed, when one acts in a contrarian way, it happens that it could already be the majority bet! In addition, it gives a kind of ground basis for any analysis process of market moves, for any financial products! An interesting consequence: the desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.
What’s up? Right now, one needs to understand the negative market psychology and find right opportunities. One needs to anticipate where the economy, earnings, will be in a few months…
February 24th, 2008 at 12:10 pm
[…] All Forex for your Currency Exchange Fix | Forex Trading Report wrote an interesting post today onHere’s a quick excerpt If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring nor […]