Law of large numbers

In all forms of trading – whether it be short, medium or long-term trading – there is an overwhelming tendency to take winning trades (incorrectly) too early – that is before the target, and to allow losing trades (correctly) to go all the way to our stop-loss.

Psychologists would, I’m sure, have a reasonable explanation for this. But it does cause a disproportionate problem for the trader. If we are trading correctly, like a casino, then we are looking for the accumulated smaller percentage over the long run, and after the many wins, losses, and break-even trades.

That casino percentage is quickly taken away when our losses are often greater than our wins. Therefore we have to develop a very clear ‘don’t touch until target’ strategy.

Easier said than done I agree. However, we manage it with our stop-loss position so clearly it must be possible with our target position too. Within my “algorithm to trade by” page I’ve set myself very clear rules that prevent me (emotionally) from taking profits early without a predefined strategic reason.

To be consistently profitable it helps to have the ‘law of large numbers’ batting for us.

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