Mandelbrot
Imagine you’re at a carnival, enjoying the lights and sounds, when you come across a coin-toss game. The excitement is palpable. You’re told that if the coin lands on heads, you’ll double your bet, but if it lands on tails, you’ll lose everything. The 50% chance of doubling your money is a siren’s call. But as you play, you realize the trick: a single loss means you’re out of the game forever.
The coin-toss at the carnival is deceptive, much like the world of day trading. Both introduce you to the concept of ergodicity. While it’s simple to grasp the average outcome from probability theory, when thousands play the game. An individual’s long-term experience is entirely different. Similarly, in day trading, one doesn’t execute thousands of trades simultaneously. It’s a sequential game, one trade at a time, staking a portion of one’s capital every single time.
Ergodicity, put simply, is understanding what happens on average versus what happens to you as an individual over time. The carnival game, when played by many, might see roughly half win and half lose. However, when one person plays repeatedly, that inevitable loss will come around, knocking them out of the game for good.
When I started day trading, it was after thoroughly studying different strategies and developing a proper risk management process. I ended up developing strategies on pullbacks, reversals and breakouts. I documented my setup and entry criteria, ensuring that each strategy had a positive expected outcome. Strategies showed more wins than losses, or bigger gains compared to smaller losses. On paper, it looked promising.
However, the tumultuous and unpredictable nature of markets, filled with external factors, market sentiments, and unexpected news, added layers of complexity.
I found myself in scenarios where even a strategy promising a win 70% of the time brought consecutive losses right from the start. An unexpected market event might cause a significant asset drop. Even with a positive average outcome, the risk of wipeout was always looming.
Most traders experience this sobering realization: in trading’s sequential nature, many face consecutive losses, while only a few strike gold. This inconsistency is due to financial systems being non-ergodic. The average success of a strategy doesn’t guarantee personal success.
Reflecting on this journey, I realize that it’s not just about the fleeting victories or the temporary setbacks; it’s about seeking sustainable solutions. Whether it’s in business, personal finance, or day-to-day choices, sustainability should be at the forefront. It’s the key to navigating life’s complexities, ensuring we must survive and only then we would be able to thrive.