Why We Should Not Follow "The Best" Trading Advice

Listening to consultants, academics, and so-called "experts" on best practices can be incredibly unbearable. On the surface, their advice may appear sensible. Take trading, for instance, where almost everyone instructs you to wait for a specific setup, seize the opportunity, and execute trades with a risk-reward ratio of at least two-to-one, ensuring a positive outlook in the long run. It all sounds appealing until you put it into practice.

The issue with this advice lies in its heavy reliance on statistics. As Benjamin Disraeli famously said, "there are lies, damned lies, and statistics." Statistics are built upon a set of assumptions that often prove to be entirely unrealistic in real-life situations. When it comes to trading with two-to-one risk-reward ratios, the underlying assumption is that you will need to undertake numerous trades—possibly hundreds, two hundreds, five hundreds, or even a thousand—to witness the desired odds. However, even after such a substantial number of trades, the outcome may still not align with your expectations. This is primarily due to the fact that markets are dynamic environments, where the odds are not fixed like they are in a predictable setting such as Las Vegas.

Who in their right mind enters the trading world with such expectations? Academics always look down upon the general public for their inability to assess probabilities. An exemplary demonstration of "cognitive failure to understand odds" is the frequently conducted experiment where individuals consistently opt for a guaranteed payout of $500 over a 50% chance of winning $1,000, even though the expected value remains the same in both cases. I would even venture to say that most people would choose a certain $500 over the possibility of $2,000, despite the expected value of $2,000 being twice that of $500. It may appear irrational, foolish, and suboptimal, but in reality, the true fools in this scenario are the academics.

The underlying reason, of course, lies in an implicit assumption of statistics. If I were to offer you $500 right now or promise you the chance to win $2,000 but with the risk of ending up with nothing, which would you choose? Naturally, you would opt for the immediate $500 because in real life, we don't have the luxury of playing the game a thousand times over to achieve the optimal outcome. Real life imposes various constraints such as limited capital, time, effort, and the inherent risk of unpredictable changes.

This is precisely why you will never, under any circumstances, adhere to the "proper" trading advice. It's why the concept of a "process" is an illusion for most individuals who attempt it. We are not robots, we don't possess boundless capital, and we are psychologically inclined to make all the wrong choices. It also explains why countless academics who preach about best practices fail miserably when confronted with real market conditions. History is replete with renowned academics who have penned elegant papers and meticulously reasoned books, only to squander their funds and reduce them to nothing when their assumptions clash with the constraints of reality. As the wise philosopher Mike Tyson once stated, "Everyone has a plan until they get punched in the face."

Therefore, when you embark on your trading journey, it is crucial to maintain a skeptical mindset towards all the conventional advice that comes your way. If the widely accepted wisdom truly worked, we would all amass fortunes within a matter of days. However, the truth is that our decisions are often based on a limited sample size, perhaps just one or a mere three to ten instances. It's important to acknowledge that there are limitations, both financial and psychological, to the pain we can endure. Consequently, even if something appears mathematically optimal—especially if it appears mathematically optimal—it is highly likely to result in utter failure when applied to real-life trading.

To trade successfully, you must first come to terms with the fact that you will never be able to strictly adhere to best practices. Do not blindly follow someone else's idea of what you should be doing. The most vital aspect of trading is discovering what suits you best and constructing a strategy that capitalizes on your strengths.

Adopted from Boris Schlossberg article on FXStreet.