Always Think in Probabilities

You can do all the fundamental research/quant/technical stuff, but, in the end, this is still a probability game. If you are really good, you may be right 55-60 % of the time. However, how you react to either outcome is very important, if not crucial, and it’s something you need to learn. If you are able to just lose 1 USD when you’re wrong, and win 2 USD when you’re right, then you’re doing well even with a 50 %-win rate.

It’s not about the win rate; it’s about the probabilities times the payoffs. So, find setups that are promising (your thesis) and have a plan on how to react to all outcomes (position management). Cut your losses quickly and let your winners run.

Let’s assume a symmetrical payoff of 1 USD (win or lose). It’s better to trade 3 times a setup with a 60 % win rate, than to waste time by conducting much more research to find just one setup (trade) with a 70 % positive outcome. The economic law of decreasing marginal benefit also applies to research in investing/trading.

My experience is that when people feel pretty comfortable with a trade setup (with an expected, high win rate) they get sloppy with the position management once the trade goes against them (they either have no exit plan or the plan gets violated or completely ignored). Therefore, it’s quite ironic that probably the biggest losses most often come from trades that looked most promising.

Key points:

  • Think always in probabilities. Nothing is sure and everything is possible.
  • Be prepared for both outcomes. The risk and position management has to protect you.
  • Make a plan and stick to your plan.


About me

Former hedge fund portfolio manager/trader

15 years of experience in financial markets

✓ Master of Science (MSc) in Business and Economics from the University of Basel

✓ Developed quantitative tools for an asset management