There is no such thing as probability, said professor Bruno de Finetti, the founder of subjective Bayesian statistics. If you don’t know what Bayesian statistics is, suffice it to say that Bayesian statistics makes your brain work, makes AI work and is basically the best way to deal with uncertainty, errors and a lack of information. Trading is basically uncertain, full of errors and you lack a lot of information.
If you predict something, your brain assumes you know for sure. For that reason de Finetti replaced prediction with prevision. Rather than predicting something you foresee multiple scenarios. In the case of the market, whether the market goes up, down or sideways as per command $4.
What de Finetti meant is that probability doesn’t exist in the real world. Events either happen or they don’t. The market goes up or the market doesn’t go up. The market doesn’t have a probability property. Probability is the strength of our beliefs. That is why probability is always subjective. Because your beliefs are always subjective.
As your beliefs about the market are probably wrong, it is a bad idea to act on your beliefs. Instead it is much better to plan for three scenarios:
- What do I do if the market rises or closes above point X?
- What do I do if the market drops or closes below point Y?
- How do I profit if the market moves sideways?
This approach makes your trading robotic. In most cases you can program your trades days or even weeks before the trading opportunity arises as long as you make the automatic trades conditional upon your scenarios.