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7058346583_61c381e636_bI’m sitting here at my desk looking out the window. On my desk is a (perfectly normal and fair) coin that I had been flipping a while. Question: can you tell me how many heads I flipped?

Now, think about that question a few moments. If you had to guess, what would you guess? Maybe I’ve been sitting here watching Netflix for a couple of hours flipping a coin. Maybe I flipped it while I was on the phone for just a few minutes. Maybe I just flipped it once or twice. You probably could figure out some reasonable estimate of how long a (mostly sane) person would sit flipping a coin, add into it an estimate of how many times you could flip each minute, and come up with some kind of answer. You can probably guess that there’s some practical upper limit to how many times I flipped it, and the probability distribution of how long I’ve been flipping probably has a lot of weight near the origin and not much out in the tail.  If this was an interview question for a consulting firm, you could come up with some answer.

Now, here’s another question: how sure are you of that answer? How confident can you be that you’re within 10% of the right number of coin flips? This is the question that really matters. Ok… hold on to that thought.

Let me give you one more piece of information. If I tell you I flipped 67 tails, does that change your answer to how many heads I flipped? It should–now you know if 5, or 65, or 65,000 is a better guess. How confident are you about your guess now?

Here’s the point of this post, and it’s not a math lesson: heads and tails go together. You can’t have one without the other. The same process that generates the tails generates the heads. You might even say that heads and tails “live together” or that “tails live in the land of heads”.

This is such a simple observation that many of my readers probably already clicked away, but I want you to think of this in two ways. First, this lesson generalizes to life. I think you can often tell how successful someone is by asking how many times they have failed. Most big, successful businesses (and individuals) have a string of dramatic failures behind them. In some sense, we learn from those failures and move forward.

But there’s another way to think about this–life and business are really about the odds. Chance and luck do play a part, but you have to put yourself in those situations where chance and luck can work in your favor. The more times you’re at bat, the better the chance you’re going to hear that crack and everyone can just stand and watch the ball sail over the fence. One of the most inspiring quotes I’ve ever heard–and maybe it’s as much for its gritty realism as anything else, comes from Mark Cuban: “it doesn’t matter how many times you fail.It doesn’t matter how many times you almost get it right. No one is going to know or care about your failures, and neither should you… All that matters in business is that you get it right once. Then everyone can tell you how lucky you are.

If you’re a trader, think about your losses in this context. How do you feel about those losses? Do you feel shame? Fear that your next trade might be a loser? Do you do things designed to minimize the size and chance of your losses? (Be aware that those two things work against each other–fearful traders often generate very small, but very certain losses. This is one way to die as a trader.) Or do you welcome your losing trades?

Do you know that all of your winning trades live in the land of loss? Do you realize, wholeheartedly, that your losses and wins are two sides of that same coin? Do you know your losses are essential to your success? The more winning traders you have in the course of your career, the more losing trades you will have–winning lives in the land of losing, just like the heads and tails on that coin I flipped.

When we understand this–and if we are sure that we are trading with an edge–then trading becomes easy. Fear of loss vanishes

To me, this is a simple, but profound truth. It also just happens that this simple thing is one of the keys of approaching trading with a professional mindset, and becoming fully comfortable with probability, risk, and the nature of a trading edge–all essential to your eventual success as a trader or investor.

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