Why you will never follow the “best trading advice”

Is there anything more insufferable in life than having to listen to consultants, academics, and "experts" on the subject of best practices? On the surface, the advice seems to make eminent sense. In trading, for example, almost everyone teaches you to wait for a setup, take the setup, and trade it with at least a two-to-one risk-reward ratio so that you can have positive expectancy over the long run. That sounds really good until you actually try it in practice.

The problem with all of this advice is that it relies on statistics, and, of course, in the inimitable words of Benjamin Disraeli, "there are lies, damned lies, and statistics." Statistics rely on a series of hidden assumptions that are often utterly unrealistic in real-life scenarios. When it comes to trading with the two-to-one risk-reward ratios, the underlying assumption is that you will need to make a hundred, two hundred, five hundred, perhaps even a thousand trades in order to realize the proper odds. And even then, the result may not comport with your expectation simply because markets are a dynamic environment where the odds are not fixed like they are in Vegas.

Who in their right mind comes to trading with that expectation in hand? Academics always sneer at the stupidity of the general public in evaluating odds. A classic example of "cognitive failure to understand odds" is the often-repeated experiment where people will inevitably choose a guaranteed payout of $500 versus a 50% chance of $1,000, even though the expected value is the same in both cases. I would go so far as to say that most people will actually choose a guaranteed $500 versus the possibility of $2,000, even though the expected value of $2,000 is twice that of $500. It may seem irrational, it may seem stupid, it may seem suboptimal, but actually, the only fools in this scenario are the academics.

And the reason why, of course, has to do with a hidden assumption of statistics. If I put $500 in your hand right now versus promising you the possibility of $2,000 but also the prospect of $0, what would you take? Of course, you'll take $500 because in real life, you don't get to play the game a thousand times over in order to achieve the optimal result. In real life, we have many constraints - capital, time, effort, and just the general risk of regime change.

That is why you will never, ever, ever follow the proper trading advice. That is why the notion of "process" is an illusion for almost anyone who tries it. We are not robots, we don't have unlimited capital, and we're psychologically wired to do all the wrong things. It's also why almost every single academic who likes to pontificate about best practices fails miserably when trading in real market conditions. History is littered with famous academics writing elegant papers and beautifully reasoned books, only to raise money and burn it to zero when real-life constraints collide with their assumptions. As that great philosopher Mike Tyson once said, "Everyone has a plan until they get punched in the face."

So, when you start trading, it's crucial to maintain a skeptical attitude towards all the conventional advice you receive. If conventional wisdom truly worked, we would all become billionaires within a few days. However, the reality is that we base our decisions on a limited sample size, perhaps just one, or at most three to ten instances. It's important to recognize that there are limits, both financially and psychologically, to the pain we can tolerate. That's why, even if something appears mathematically optimal - particularly if it seems mathematically optimal - it is highly likely to fail miserably in real life trading.

To trade well, you first have to make peace with the fact that you are never going to be able to follow best practices. Do not follow someone else's idea of what you should be doing. The most important thing you can do in trading is to discover what you're most comfortable with and then construct a strategy that plays to your strengths.