What follows is a true and factual story. A University in the US did an experiment to understand more about the psychology of success. This experiment has subsequently been repeated a number of times at different places and by different people.

The experiment asked people (experiment subjects) to guess the outcome of tossing a coin and measured how many times they guessed correctly and incorrectly.

Let me ask you a question, if the coin were tossed 500 times how many times would you expect to guess the outcome correctly? That’s right around 250 times or 50% of the time. It doesn’t matter how clever you are or hard you concentrate the outcome is determined by the laws of probability. Just about everyone understands this and knows it.

In any 500 tosses there is a fairly good chance that you will put together several runs of guessing five or six tosses in a row correctly. This is where the psychology of success kicks in. The experimenters asked the people guessing the outcome of the coin tosses their opinion on how they felt about their own performance at various times during the experiment.

An interesting outcome observed was that subjects who were having a string of successful guesses (say four or more in a row) believed they were actually responsible for this success. The reasons stated ranged from an improvement in their performance at guessing and tossing the coin, through to a belief that by concentrating harder they improved their performance.

Let’s stop right here. People who know that the outcome of a guess is based on a strict 50% probabilistic outcome believe that when they have a few guesses correct in a row that it is because of their talent and ability. How scary is that.

The same contradiction happens with traders and investors all the time when trading or investing in the stock market. This is especially observable with new traders and investers. The trader/invester may grow to believe they have “special talents” after a string of winning trades. This may make the trader/invester believe that they are somehow better, or have a special talent for trading, whereby their success has really only been because of probable “chance”.

The way to manage chance success in your trading/investing is to not become over confident and forget your risk management strategies. Enjoy your success but don’t forget the risks. If you do not manage the risk of future trades properly or take on too many trades and over-extend yourself then you may leave yourself volunerable to the Market Slap. The stock market has a habit of slapping down traders who become over confident and take on too much risk with a large loss.

The truth here is that every trade involves risk and every trader should be managing risk. This means protecting your capital and not getting carried away with your successes. Beware the Market Slap!

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