The role of luck in trading outcomes is an interesting one. We use some excerpts from Jason Zweig’s book, The Psychology of Money: Timeless lessons on wealth, greed, and happiness to examine trading luck. Many people do not believe luck has a role in financial success since it is so hard to quantify and rude to suggest people are not owed their own successes. However, ignoring luck as a factor of success could steer you wrong in your trading.
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Bad results are not always the result of a bad decision. Often, when we take a calculated risk, and it goes poorly, we assume that it was because we made a bad decision. We look at the result and assume, based on the outcome, whether it was a good or bad decision. This is extremely misleading because results, good or bad, can be highly dependent on luck. Ignoring this fact will make us ignore the role luck that had in the trade, often leading to poor decisions. When you assume that if you won the trade, then your strategy is good. This leads to you learning something in the wrong way. The same can be assumed if you lose a trade. If you abandon a good strategy just because it failed. Then you are literally unlearning a good skill. Luckily it is possible to statistically measure whether some decisions were wise regardless of the outcome, but unfortunately, we simply do not because it requires too much effort.
Nuance means that we are making our own decisions and taking on responsibility for outcomes. This takes effort and creates risk that we could be wrong. Our brains are wired to avoid pain, seek pleasure, and conserve energy, meaning it would be natural to search for the easy answer. The obvious, easy answer is find a rule set that I can be sure wins all the time. It also means that people take the shortcut of thinking if I won, I did the right thing, and if I lost, I did the wrong thing. Unfortunately, this type of mindset is devastating to your success as a trader.
The Bottom Line
The role of luck in trading outcomes is an important one to understand. Luck and risk play a central role in trading. They are responsible, at least in part, for the outcomes we experience every day. It is important not to mistake good luck for a good strategy, or bad luck for a bad strategy. We must instead set aside the outcome and focus on evaluating our decisions based on the quality of our process.