A Simple Lesson In Probabilities In Stock Market Trading

Posted on April 8, 2008
Filed Under Trading Courses |


Before we begin let me ask you this question…

If the last 3 times you traded stock XYZ you lost money and now you are getting another buy signal for XYZ do you take the trade or pass?

Now for the lesson…

I produce a fair coin from my pocket and flip it in the air and ask you to call heads or tails. You call heads and sure enough heads comes up. We do this 9 more times and each time the coin comes up heads making you a lucky winner 10 times in a row!

Now what are the odds that the next time I toss the coin it will come up heads again?

Do you have your answer?

I hope you said the odds are 50/50 as each time the coin is tossed it is a brand new independent event with no relation whatsoever to the prior tosses.

In fact, the odds for each coin toss was always 50/50, it can either be heads or tails that’s it. Prior flip results have no influence on the next toss of the coin, you just happened to get lucky with 10 heads results in a row.

Now let me ask you this…

Do you take the XYZ trade or pass?

Sometimes the simplest trading lessons are the best :)

Comments

2 Responses to “A Simple Lesson In Probabilities In Stock Market Trading”

  1. matt on April 18th, 2008 2:10 pm

    hi i enjoyed the read

  2. Mike on April 18th, 2008 4:37 pm

    Matt, thanks for stopping by!

    Mike

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