Maintaining Unwavering Discipline
It's not the work that's hard, it's the discipline.
Positive expectancy trading models fail because speculators abandon prudent risk management methodologies or they deviate from the models themselves. This chapter completes our introduction to the casino paradigm by exploring why traders abandon positive expectancy models or price risk management. Particular emphasis is on development and use of various psychological tools to aid in maintaining trader discipline.
What makes successful trading so challenging is that it is possible to develop a positive expectancy trading model and still lose overall even if you are properly capitalized and employ prudent rules of price risk management. The problem is best illustrated by the analogy of the opaque urn.1 An opaque urn containing 100 marbles is placed in the center of the room. Fifty-seven of those marbles are green and 43 are red. Now I ask you to bet on the color of the marble you will pull from the urn, and you pick green. Out comes a red marble. I again ask you to pick the color of the marble, again you choose green, and again you pull a red marble. Third time: You choose green, and out comes a red marble. Fourth time, you again choose green and again pull out a red marble. After the fourth loss, you begin to doubt. Maybe there are more red marbles than green. And so you either stop betting altogether or worse still, you bet on the red marble.