Traders spend a majority of their time thinking about their view. Think about ALL the cumulative manpower and brainpower involved in the analysis of markets and most of it focuses on “up” or “down.” Traders don’t spend nearly as much time thinking about the implementation of that view. It would be one thing if people were right more than 60% of the time, but it’s typically not if you compare the results to a relevant benchmark.
If you are only going to be right 55-60% of the time (at best for the vast majority of traders), then the expression of your view is just as important as the view itself. By the “expression of your view,” I am talking about how you go about structuring your trade. When you can think in terms of more than just “up” and “down,” you can structure a trade that offers a better gain when you are right and/or a lower loss when you are wrong. Just think about how much better your performance would be if you could say, cut your losses in half when your view is wrong. Even cutting your losses by 25% when you are wrong would show a significant gain over time. In fact, cutting your losses by 25% (on a coinflip) would show a larger expected value gain than on a 55-45 view.
Some people may claim, “well, even when I trade ‘up’ and ‘down,’ because I make 2x more when I am right than when I am wrong, I still do well.” Maybe. My observation has been that people tend to over-estimate their winners when they are right, and underestimate their losses when they are wrong, relative to their benhmark. But even if your winners move 2x as much as your losers, it still makes the expression of your view important. Just think how much better your results would be if you could increase the value of your winners and/or lower the value of your losers. Case in point… if a monkey like me who made these types of terrible predictions at the beginning of the year can be up 396 basis point-units in less than 2.5 years, that says a ton about the power of trade expression. Don’t just think about your view. That is only part of the trade. Also think about how you go about structuring your view to improve your expected value. The expression of the view is at least as important as the view itself.