Share Trading is all about having the balance of probability on your side. In fact to succeed in the marketplace we only have to tip the scale of probability ever so slightly in our favour. This is evidenced by the fact that Casinos only have a tiny edge over the players of a mere 2% at the roulette table. This seemingly insignificant advantage is then compounded over a massive number of spins to create profits of mouth watering proportions. To give you some idea of the size of these profits; most Casinos have to count their money by weighing it.

But while most of us have a clear understanding of the science of probability, not all of us have the stomach for it. To illustrate my point let's consider the simple game of coin toss where the payouts are even, making it a fair game of chance. Everyone agrees that when tossing a coin, the probable outcome is evenly split between heads and tails, ie. the chances of heads occurring is 50% and the chances of tails occurring is 50%. The results of 100 consecutive coin tosses is shown in the following chart of 'Balance of outcomes'.

Now, whilst the probable outcome of tossing a coin is an even split between heads and tails, it doesn't mean that the outcome will oscillate perfectly between heads and tails in a flip/flop head, tail, head, tail, head, tail pattern. However, it does mean that the balance of outcomes will always return to the base-line of zero. But it can in fact deviate by as much as 7, according to the above example, and it is this deviation that can be hard to stomach.

Let's assume that you are betting on tails in our game of coin toss and therefore you are down by 5 tosses after the 21^st game. In other words, you have lost 13 games and won only 8. At this point most people will want to inspect the coin and maybe have a turn at tossing it for a while.

Now miraculously the odds swing in your favour and you find that you're ahead by 7 tosses at the end of the 39^th game. Of course your opponent is now the one beginning to question the fairness of the game. But just to make matters worse let's assume that you don't actually get to witness the game of coin toss. Both players are simply being given the results of the game, played at a remote location, by a supposedly reliable third party. Now ask yourself, if you were down 13 losses to 8 wins, whether you would drop out of the game because you believed there was a bias in the process. (And I forgot to mention that the wager on each game is $1,000.)

Unfortunately this is an all too common occurrence in the Stockmarket, particularly during tough times. So while the All Ordinaries has risen by 9% on average for the past 100 years, many individuals simply lose faith in that fact during periods such as 2002, pictured below.

A more common expression of this phenomenon is how some individuals can prove a strategy through comprehensive backtesting, only to dismiss it as a failure after trading it in realtime for as little as 10 trades. It appears they just don't have the stomach for probability. Their ability to maintain their 'Mathematical' objectivity is lost because their hip pocket nerves eventually override all other thinking by transmitting ever increasing pain signals to the brain.

It is a well accepted fact amongst professional traders that a losing streak of 8 consecutive losses is not at all uncommon. This is why the ability to sustain losses is so important, not only in terms of your trading capital but also with respect to your 'Psychological' capital. To preserve your trading capital, I recommend sticking to the 2% risk rule. To preserve your psychological capital I recommend carrying a coin at all times; you never know when you might have to play a game of coin toss and prove to yourself that a string of 8 consecutive losses is very possible.