The difference between insanity and rationality in trading

We've all heard the saying, "the definition of insanity is doing the same thing over and over and expecting different results", often speculatively attributed to Albert Einstein.

Unless Einstein had no grasp of probability, he probably never said this.

I'd rephrase that saying (in the context of trading) to read, "the definition of rationality is doing the same thing over and over again and knowing that the results will statistically converge to the same outcomes over time." That's less catchy, but makes a lot more sense.

The problem is that we don't do the same thing over and over, i.e. maintain consistency in our trading strategy.

If you have a positive edge, the only way to realize it is so perform the same actions every day with discipline, and to keep your risk under control so as to not blow up. Even a losing streak should be accepted and even embraced, knowing that a winning streak may be on the horizon to even things out. What goes wrong is our tendency to develop a conditional strategy, that is a strategy that dynamically changes course based on immediately preceding outcomes. This is where training yourself to stay the course pays off rather than being subject to emotional swings that a recent victory or loss may induce.

In other words, insanity is precisely the inverse of what you'd figure by the supposed Einstein quote! It's not rational (I'll refrain from going so far as to call it insane) to try different things and expect different (statistically relevant) results when dealing with a complex beast like the markets, when all you're doing is essentially randomly walking through a mine field.

Happy trading!