What a Simple Bingo Game Can Teach Us?
Kids playing with a MMORPG (in case you do not know what that is – it is the kind of game Wikipedia founder Jimmy Wales played and probably obsessed with many years ago) found a mini-game within the game that essentially plays like bingo.
Each player can get a game board with 5X5 grid filled with numbers from 1 to 25. All cells are unique. Boards are generated by random so it is not likely two players are getting the same number arrangement on their boards.
To play the mini-game, a player has to stay online connected to the game where every 30 minutes 1 token will be given. Another way to get a token is to explore around the virtual environment and hunt the monsters for a small chance per kill to get an extra token. One token is required per lucky draw for a number to be matched in the bingo board. If you get a row or a column completely matched, you will be rewarded with a special prize. Matching all numbers on the board will earn you a very special grand prize.
The problem – kids just discovered that it is very frustrating to get the board filled.
Somehow they feel like the game is cheating on them and not letting them to get that very special prize at all. Draw after draw that very last number on the bingo board just refuses to be filled. Why?
Statistics vs. How We Feel
Following is a table showing the number of draws needed on average to get at least one more number filled based on how many numbers are left at the moment. For example, when the board is new (all numbers are still there), the expectation is that you have 100% chance of getting one of the numbers there with just 1 draw. By the time the board has only 5 numbers left, it takes at least 5 draws on average to get one of them filled.
This table helped the kids realizing the truth – even though the goal of matching another number looks the same, the conditions keep changing. In fact, to fill the last 4 numbers to get the grand prize means double the number of tokens needed! So instead of complaining, off they go happy grinding (to mindlessly killing monsters within a game to gain something). Issue resolved.
We Cannot Control Our Own Swings in Winning Probability
Our performance seldom happens in a straight line. It is not like 30 trades taken you get 70% winning rate and then the next 30 trades you get 70% winning rate again.
One of the things that setback many traders is that when their overall performance is sitting at about 60% to 65%. It is the usual zone where traders start to become profitable. It is also the most vulnerable time in their trading skill development.
Think about the emotional swings they have to deal with. At times, they are "in the zone" and performing at 70% or better winning rate so every 4 trades 3 are winners. Sometimes, however, they swing to 50% or maybe a bit lower in winning rate, which implies every 3 trades 1 to 2 of them are losers. It is very difficult to deal with, especially when they think they have it figured out finally.
How to maintain a healthy attitude with proper perspective of the trading results is very important. Making a connection between your performance swings and how that affect the outcomes you are experiencing should help building your confidence in yourself without the unnecessary emotional trouble.
Counter-Trend Methods vs. Strong Trend Development
In our premium report Hot n Cold, a number of classic trading models are tracked. Those ones with style "CT" are the counter-trend trading models. Those having the style "TF" are trend following models.
Counter-trend trading models tend to have higher winning percentage (the WP column in the report tables) during sideway markets. Then as the market develops into trending mode, counter-trend models will have lower winning rate but still healthy readings. Once a market started to go into strong trend mode, counter-trend models will suffer and winning rate will easily dip below 50%.
The bingo statistics above is equally applicable to winning percentage of a trading model. It gives you a good reason to pay attention when you know CT models in general are dipping below 55%. First, you will likely get more losers than winners if you trade counter-trend. Second, isn’t it better to join the strong trend in the making?
By knowing that a particular CT model is weakening, you know what to avoid in your own trading. For example, if the 90 days rolling performance of Bollinger Band OB/OS model is in a declining phase, then you know using range based (and confirmation based) counter-trend methods will be less reliable. If Relative Strength Index is still going strong, that implies you should instead focus on time based (and extreme fading) methods if you like trading counter-trend.
I do not track the Hot n Cold report everyday. Instead, I review them once a week spotting for subtle changes in the performance of the trading models. If I suspect that we are witnessing something big coming in the underlying market, I will go back to the chart to confirm what I found out from the report. It is like my insurance policy against my own personal bias. For example, if the objective statistics on the models confirm the trend is weakening, then my swing trade directional bet should focus on taking profit at target zone as oppose to holding for more.