Observation, Experience, Memory and Mathematics

“Observation, experience, memory and mathematics – these are what the successful trader must depend on. He must not only observe but remember at all times what he has observed. He cannot bet on the unreasonable or the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities – that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

“A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets. After years of the game it becomes a habit to keep posted. He acts almost automatically. He acquires the invaluable professional attitude that enables him to beat the game – at times! This difference between the professional and the amateur or occasional trader cannot be overemphasized. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures.”

– Reminiscences of a Stock Operator, Annotated Edition

How well does the above describe your trading process? Have you made a bankable investment in ‘observation, experience, memory and mathematics’?

What is the practical interpretation of the instruction to ‘always bet on probabilities’?

Sometimes, a lower-probability-outcome bet nevertheless has high expected value (because of the payoff profile), thus making it attractive from a repeated trials perspective.

How might a grounding in mathematics help a trader exploit this truth (along with other foundational math concepts)?

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