“I believe in the sun, even when it doesn’t shine.
I believe in love, even when it isn’t shown.”
What other things do you believe in that are unseen? Gravity? Radio waves? Microwaves?
Gravity, causes the apple fall to the ground from the apple tree. Radio waves, used by your ‘wireless’. Microwaves, used by mobile phones.
Why do you believe in these concepts even though they are unseen? How would you explain what radio waves and microwaves are to somebody that has never used an FM/MW/SW radio or mobile phone? Even more importantly, how would you get them to trust that they work and won’t harm them, physically, mentally or emotionally?
Why is this a topic for a blog posting on a financial services website? Well sometimes when explaining something as unseen as an ‘edge’ in the market and how and why it works, I feel like I’m trying to explain the existence of radio waves to somebody that has time-travelled from the 1820’s.
Maybe I shouldn’t feel like this because most people today still do not understand radio waves or have never had the workings of ‘wireless’ radio explained to them, but they believe that radio waves exist, work and won’t harm even though they are unseen. They accept that there is a scientific explanation for how a ‘wireless radio’ works and thus trust and therefore are comfortable using a ‘wireless radio’.
An edge in the market is similar. It is unseen, intangible and works. And yes, there is a scientific explanation of how and why an ‘edge’ in the market works. See my many postings on this subject over the last few years.
Some readers get it totally, others get it but do not believe or trust it and others just don’t get this ‘edge’ thing at all, even though they may be active investors in the markets.
Why is it so difficult? Here are some possible explanations as to why many battle to get it:
The rate of radio and microwaves completing an event successfully is very high, close to 100% (interference and noise causes < 100%). This could be viewed as a ‘win rate’.
The ‘win rate’ of a positive edge in the market ranges from 30% to 65%, depending on the strategy being used. However, an ‘edge’ in the market involves more than just a ‘win rate’, it also requires a calculation for a Profit Ratio (also called a Payoff Ratio).
There is money involved when trading the markets and, for whatever reason, human beings have been programmed over the centuries to put a lot of meaning into money, probably too much.
This means that when money is lost in one of the 70% – 35% losers in any given ‘edge’ the negative emotional pain is far greater than the positive emotional gain from a winner. Money from the winners is taken for granted whereas money from losers is magnified and this causes all sorts of emotional and mental issues that need to be overcome to become successful at investing over the long term.
Radio and microwaves not working don’t cause emotional or mental pain, or very little (although these days, with the way that some people react to their mobile phone not working, maybe this is changing J).
The effect of ‘small samples’.
Human beings opinions seem to be affected by a ‘sample of a few’, particularly recent occurrences, setting their entire opinion on most things in life. With a few things in life there should be ‘one strike and you are out’ but with most a ‘sample of a few’ simply will not work as negative outcomes occur far more regularly than we would like to accept.
This may also be termed the inability to see, understand and trust the big picture.
This is also why finding principles founded on beliefs, in any given walk in life, is so important.
Other unseen ‘laws’ that you may have come across that don’t have a near 100% ‘win rate’ but do deliver an edge when executed over a large sample:
They don’t have a 100% hit rate because there are always many other variables at play over which we have no or very little control that can affect them.
Edges in the market work, there is no doubt about this. This can and has been demonstrated mathematically and in real life execution. The mathematics of expectancy, volatility, position sizing and compounding behind market edges, such as SPA3, is unseen, yet they do work and work very well.
But why not for everybody? Because we don’t see what there is to see, we only see what we are conditioned to see. You can change your conditioning if you desire to ……
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