Traders instinctively want to avoid randomness, but this should not be the
case. Say you have discovered that your trading system, on average, produces two
winners for every three trades. This may be good news, but it does not mean the
strategy will always produce two winners followed by one loser, followed by two
winners, and so on.
To think that the strategy will follow a distinct pattern of wins and losses is
dangerous, because this assumption may cause you to risk too much on a losing
trade and not enough on a winning trade, when the pattern that you thought exist-
ed breaks down. Therefore, the more difficult it is to predict the outcomes of two
or more consecutive trades, the better the system will perform, because it will not
be based on potentially erroneous assumptions about the outcomes of any partic-
ular trades.
Following these lines of thinking, you can decrease your dependence on luck
by not only making sure your strategy is highly likely to produce winners (i.e., do
a good job of profiting from those rare nonrandom market moves and situations
that the system is designed to catch), but also, strange as it might sound, by mak-
ing sure you still can’t predict the outcome of the next trade.
When it comes to the reliance on luck, both profitable and unprofitable
traders can be divided into smaller subgroups: those who are skilled and those who
are just plain lucky. If you truly care about your trading results, you need to know
how much of your profits depend on pure luck. Certainly, every active trader is
lucky to a certain extent, because the truth is there’s always a chance—however
slim—that the market will blow you out completely.
The trick is to make the likelihood for this as small as possible by keeping
your skill–luck ratio as large as possible. If you’ve managed to make a good liv-
ing from trading, how do you know you couldn’t have done even better with a lit-
tle more knowledge or skill? Or, if you currently are in a losing streak, is it your
high skill level that keeps you from losing even bigger during this dry spell, or just
dumb luck that is keeping you down?288 PART 4 Money Management