Simulation And Trading

Simulation and Trading

Traders forecast future prices using some combinations of fundamentals, indicators, patterns, and behavior from the past. They hope that recent history will forecast the future helping them to make some profit. The problem, however, is that nothing that has happened in the past is any guarantee for the favorable results in the future. Basically, profitability of each trade has elements of some randomness and uncertainty. Here is the problem that many people are not equipped with enough knowledge and tools to manage uncertainty, thus mastering the psychology of trading.

At first glance trading may seem quite trivial. You just look at price chart, then buy here and sell there. But it in practice it's much more complex than that. Trading is about what had happened in the past while trying to predict what will happen in the future. However, no one can precisely know the future in advance. Dealing with random outcomes from each trade, trading is a probability exercise, where a good trader biases the outcomes of each trade in his or her own favor. As, in order to succeed a trader need to have probability on his or her side. Traders use patterns from the past to forecast the future. Forecast doesn't mean certainty, but it's about that we know the likely future direction of the market where we are trading. However, we can be certain that in the past when the patterns, fundamentals or indicators have been as they are now, then the probability is in our favor.

At the same time one needs to be very careful with forecasts and gut feeling about the direction of the market, so that one doesn't get into the trap of gambler's fallacy when dealing with risk and uncertainty. Some traders hold beliefs that are likely to be wrong. They say that after a string of losing trades success on the next trade is more likely, so position size on the next trade should be increased. This may or may not be true in trading, but for most random events like tossing coins, it is definitely not true. What it implies is that the probability of winning each trade is somehow influenced by the result of the previous trade. This is not true for rolling dice, flipping coins or drawing marbles from an urn – neither the coin, the marbles, nor the dice have any memory of the outcomes.