How to Handle Randomness

It remains an interesting, and costly, fact that while most people of average intelligence acknowledge the role of randomness in markets, they don't trade as if they do. Why?

One of the reasons is because (and this has been proven through experiment) our brains don't like randomness. Period. They don't want uncertainty, and will even compensate by creating patterns and order where none exists.

For forex trading this means that you are artificially imposing order on chaos. Now that's fine if you are dealing with unruly children but it is going to cost you dearly if you are dealing with the EURUSD. How many times were your stops hit and then the market moved in your direction soon afterward? That's artificial order imposed on randomness!

It's really, really simple.

If you go about creating patterns where none exist your process (how you analyse the market, how you make trading decisions and how you implement risk management) will lead to poor outcomes (money in your account).

Outcomes are determined by three factors: how you evaluate the problem, what action you take, and luck. If your trading system does not make sufficient allowance for randomness, you are incorrectly evaluating the problem (the market dynamics), the action you take will be wrong, and the result poor. This is the overwhelming outcome of a majority of trading systems which pay lip service to the existence of randomness in the market but then during system design display total ignorance of the problems caused by random price behaviour.

Are there any rules to counter randomness? What are they? How do you properly evaluate a problem that is bobbling around?

Yes there are. It is also really really simple. We tend to forget that our brain is by far the most sophisticated and most powerful computer around. It is highly adaptable, has amazing developmental abilities and responds very positively to repetitive cognitive inputs.

You "train your brain"; you learn to trade by doing what other are not, by thinking out of the box but having a solid and skeptical analysis of your out-of-the-box thinking.

This takes time because you need to learn a new way of seeing price behaviour and thinking about your responses via trades entered and risk management. You can't do it in a week or a month. You need a process that allows enough time for you to design a realistic system that can withstand the problems caused by randomness both on the level of trading decisions and also system evaluation. Your brain needs enough quality inputs to reverse its natural response to deny randomness and to begin to embrace it. There are no short cuts.

I don't think it can be done any other way. My trading philosophy is based on these principles. It takes, firstly, the issues regarding randomness seriously, and secondly it provides the processes and the necessary time for you to train your brain to manage the problems caused when observing the outcomes of your trading system.

You have to make the processes your own, where you slay the randomness dragon and see the outcome in the form of trading profits.