Most Investors invest by the seat of their pants, and when they are successful, they believe they can predict the markets. In many cases, it is a matter of pure luck.
When you trade stocks, your odds of winning on any play are lower than most people think, there are about 20% of the positions were profitable. The probability of winning when trade stocks will always be less than 50% in a random market.
Here it is important to understand your odds of winning. Millions of people buy lottery tickets, yet your chances of winning the big prizes are so remote that you have the same chance of winning whether you play or don't play. State lotteries are actually a voluntary tax system. Knowingly or not, people who are making a voluntary tax payment to their state.
In the casinos of Nevada, there is an acient game of Keno where twenty numbers are picked from one to eighty. Fifteen point Keno, where you try to pick fifteen out of twenty numbers pays $100,000 for a $1 ticket. What are your odds of winning? Your true odds are over 430 billion to one. Of course, no one has ever hit the fifteen spot Keno, and they never will, but thounsands of gamblers keep trying.
Investors should know how to measure their odds of winning when they trade financial products. However, even if they know their odds of profiting, Lady Luck will try to trick them, for in the world of probabilities, there are winning streaks and losing streaks.
Here is an example: during the 2001 National Basketball League (NBA) playoffs, the Sacramento Kings in one game missed twenty-two 3 point shots at the basket in a row, and they were one of the highest scoring teams in the league. Now a NBA player should hit a 3 point shot about 35%-40% of the time, so even if your odds of winning approaches 50%, you still can have long losing streaks. Therefore, even if you are doing everything right when you trade options, you could incur a long losing streak.
Such streaks discourage the financial traders. Many quit or change their system or Methodology and start making the wrong moves, extending their losing streaks. We see this behavior frequently with baseball players. When they go into a slump and cannot get a hit, they change their style of hitting and slip into a greater slump.
Lady Luck has a tendency to make us very brilliant or very stupid. Consequently, as you trade financial products, beware of Lady Luck. If you are a stock buyer, be prepared for losing streaks, stick to your game plan and don't get discouraged.
Of course, this is difficult to do and is a major obstacle for the stock buyer. If you can't handle a lot of losses, then you might want to consider trading strategies with much higher probabilities of profit.
To reiterate, as you trade, beware of Lady Luck and don't let her trick you into making the wrong move!