In trading, as in life, we are faced with the need to assess complex situations and quickly make judgements or decisions. And in both cases, we can’t be certain what the outcome of those snap decisions will be. Though we have to deal with the consequences regardless, even if they don’t reveal themselves for some time.

I wonder how many of us look back at the choices we made and judge them solely by the outcome they achieved, be that good or bad, rather than looking at how we got to that endpoint?

Behavioural psychologists believe that if we look at events purely in terms of their results, we are under the influence of outcome bias and as such we are likely to have a flawed view on risk and reward.

That outlook has been famously summed up in the phrase “picking up dimes in front of a steam roller” which has been variously attributed to Nassim Taleb and or economists Martin Wolf/John Kay.

Whoever coined the term (no pun intended) got it just right, because if you are picking up those coins then yes you are acquiring money, but you can only afford to slip up once and then it will be game over, and in a very messy way.

Another renowned economist, John Maynard Keynes, wrote on the subject of risk-reward and outcomes, just over 100 hundred years ago, in his treatise on probability.

Where Keynes thinking differed from traditional schools of thought was that he believed that an event could be, what he called, objectively probable, even if it didn’t actually take place. And that it would remain so even if you were looking back at events at a future point in time.

For Keynes, it was more important to be rational in your decision making than to be right.

Keynes of course also famously said that “the markets can remain irrational for far longer than you can remain solvent “  

That is one of my favourite quotes on investing. It neatly sums up the practicalities of being rational versus being right, as far as a trader is concerned - Being right doesn’t necessarily make you money and in fact, even if you are right waiting for that to be proven could cost you a fortune.

Whereas being rational or pragmatic, and acknowledging that the market is “directionally right “ but for the wrong reasons (which is usually the sheer weight of money) is one thing. But then trading with the market until the point when the crowd realises their folly, is likely to be a more profitable approach in the long term.

After all, by adopting this approach you don’t have to time the market at all instead you just need to watch for the points at which the crowd turns. And to that, we can use momentum and sentiment indicators, which you can set up in advance.

In short, when it comes to trading at least, the process is more important than the outcome.

The British military has a saying which runs as follows: Failing to prepare is preparing to fail.

As a trader it’s hard to fault the logic in that statement, because if we believe that there is a symmetry between risk and reward, inputs and outputs, effort and results, and in trading where there must be a loser to offset every winner, why wouldn't you believe that?

Then if we don't prepare properly for each trade we make; we are not giving ourselves the best possible chance of making money.

We often say that a systemised approach to trading is the best one to adopt. What we mean is that we should have a framework of rules that we follow in each trade we make.

And we don't let our hearts rule our head or worst of all let our egos’ fools us into thinking that we have some special insight our secret trading sauce. Because in 99.9 times out of a hundred that won't be even remotely true.

Talent and luck will carry you only so far and many a sportsperson has built a successful career by recognising their own abilities and limitations, and then working hard to improve their technique and approach.

And in turn in recognising the weaknesses in their opponents game, which they can then exploit.

The opponents may still score against them but if they are reducing the rate at which they can score then they are doing something right, and they are slanting the odds of a positive outcome in their favour.

In trading, you won't win every contest but if you win more than you lose and have bigger wins and smaller loses, then, over the long term you will definitely come out on top.