Even using a winning technique, you still can’t win unless you know this!?
Escape from the clairvoyant who searches for high-probability points that go up (down) Part 2
Why even a game with positive expectancy can still be a losing game
programmer Ralph Vinces conducted the following experiment.
He had forty PhDs play computer games.
Play a game with a 60% win rate for 100 rounds.
When you win, you gain the amount you bet; when you lose, you lose the amount you bet.
Starting amount is $1,000, and the amount bet per round is flexible.
For example,
If you bet $100 and win, you gain $100 and your balance becomes $1,100,
If you lose, you lose $100 and your balance becomes $900.
With a 60% win rate and a risk-reward of 1.1, it can be considered favorable to the player.
In the experiment, of 40 participants with PhDs, only 2 (5%) won.
As in the example, if you bet $100 each time,
Play 100 rounds with a 60% win rate
Win 60 times: +$6,000
Lose 40 times: −$4,000
Net +$2,000, suggesting it’s a winning game.
▼ Whether you win or lose depends on your betting method
The key is this rule
“The amount you bet per round is up to you”
There was a tendency among 95% who lost to bet more after losses.
They increased their stake after losses.
They decreased their stake after wins.
Why did they bet this way?
Many people naturally fall into this kind of betting pattern.
This is called in psychology thegambler's fallacythat causes it.
For example, suppose you flip a coin and the head comes up five times in a row.
Next, which do you bet on, heads or tails?
Most people would bet tails.
The probability of heads and tails is each 50%. Having heads come up five times in a row suggests that tails is more likely next.
This is the gambler's fallacy.
Fallacy = mistake. an error.
The next outcome being more likely to be tails is a mistake.
No matter how many times heads appears in a row, the probability of heads or tails next is still 50%.
There is also the famous saying, “The coin has no memory.” Each event is independent.
In the experimental game,
when losses continue, people think “the odds of winning next are high, so raise the bet,”
when winnings continue, people think “the odds of losing next are high, so lower the bet.”
This tendency was observed.
Additionally, there is a psychological urge to try to make up for losses by increasing the bet.
As this experiment shows, when you bet according to your own thoughts, humans tend to lose.
Trading is exactly the same.
Therefore, top performers who win consistently practice solid "fund management" (money management).
They plan in advance how much to bet relative to account balance, what risks to take, and they create and follow rules.
Even in games with positive expectancy, if you don’t know fund management you will lose.
Thus, fund management is more important than the method itself.
I deliver scenario series, and even if I also provide real-time entry and exit,
Person A will follow exactly the same entry and exit as me by watching it.
After a month of trading, my account balance increases.
But Person A's account balance decreases.
This can happen as well.
If you don’t know fund management, you cannot win even if you have identical entry and exit points.
Even with a superior method, if fund management is missing, capital will shrink.
If you don’t know fund management, you might think “this method is not good.”
Since actual money is shrinking, you can only conclude that the method or the timing of entries/exits is bad.
Go look for the next method.
Even if you find another advantageous method, you will lose without fund management.
And again, you’ll wander off thinking, “this method is not good, I was fooled.”
Some say 90% of those who are losing are stuck in this loop.
Fund management is so important, yet you don’t often hear people talking about it.
Some people explain fund management incorrectly.
They say cutting losses is fund management.
They claim cutting losses firmly and sticking to it protects funds, thus it is fund management.
There are people who explain this, and some say, “I know fund management, I do it. I have a clear pre-set cut loss and I stick to it.”
Whether cutting losses is fund management or whether it falls under fund management is just a definitional issue; what matters is
that simply stopping losses is not enough as fund management.
The computer game used in the experiment has the rule that losses are only the amount bet.
This means losses can be properly cut.
Even so, 95% lost, so simply setting and sticking to a cut-loss is not sufficient.
The basic idea is
to gradually bet into a positive- expectancy game.
This is the way to win.
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