Follow your edge, even if it makes you uncomfortable.
I never understood why people argue or complain about their edge, or even have an opinion on it for that matter. As Mark Douglas said, “An edge is nothing more than a higher a probability of something happening over another.”
If we took a weighted coin on heads, and flipped it 100 times, you wouldn’t disagree that tails is more likely to come up than heads. But would you tell me that getting heads a few times in a row is impossible, or shouldn’t happen at all? Of course, not.
So why do we feel differently about it in trading?
The problem, I think, is that fulfilling the promise of an edge involves our money – a precious resource – so the occasional loss isn’t just for funsies, it creates real pain. To counteract that pain, we seek to avoid the edge (or try to change the edge) instead of letting the likelihood of winning (i.e. coming up heads) play-out overtime.
A major source of trading errors comes from what psychologists call “recency bias.” If we have recently lost money a few times in a row, we’re likely to believe that pattern will repeat itself, even though we have had the same number of wins earlier.
Mark Douglas, famous for studying the behaviors of winning and losing traders says:
“All trading errors come from believing that because the pattern [edge] is present it’s going to give me a winning trade on this one – this trade is going to be a winner. You can’t think that way. That’s the way the typical trader thinks.”
If I gave you the best edge in the world, there’s no certainty that the first trade you make would be a winner. But that is not a reason to doubt or abandon the edge. By ditching your edge, or trying to change the edge in too many ways, you will never understand what actually works over a series of trades.
The true irony of it all is that an edge was designed to remove our opinions and emotions. But, because we are only human, we turn it into something it was never designed to be – instant gratification. And because of this, we never experience satisfaction.