The Difference Between a Trading Set-Up and a Market Prediction

If you’re thinking of drawing to a flush in Texas Hold’em with two cards to come, two of the suit in your hand and two of your suit on the board after the flop, the odds are 4 to 1 against hitting your flush on the turn. So if the pot is giving you a potential payoff of 5 to 1, you call. (Technically, in no-limit there might be better ways to play the hand, but I’m trying to make a point here.)

You call because if you call in this situation hundreds and thousands of times, you’ll make money on your bet over the long run. You’re not calling because you have a premonition that you’re going to hit your flush, you’re calling because the odds make it profitable over the long run for you to call in these situations.

Similarly, if you’re counting cards at blackjack, and the count goes sky high, indicating an exceptionally high percentage of tens and aces remaining in the deck, you raise your bet. You raise your bet because you’re going to get more naturals and win more double-downs and pair-split opportunities. You’re not raising your bet because someone has predicted you’ll win the next hand. You’re betting more because you’re going to make more money overall when you’re playing with a high count than when you’re playing through a low count.

Betting a trading set-up is like betting with the odds in your favor at poker or blackjack. You have information from technical analysis (or whatever gives you your edge) that tells you the odds are now in your favor, and you’ll make more money in this situation over the long run than you’ll lose. It’s a different thing from believing that you’re able to predict the future. It’s about maximizing growth of capital for a given level of risk based on the odds.

Sometimes in trading it can look like somebody is able to predict the future because you get a run of signals that go your way, or you happen to get a few signals in a row that have a really high frequency of payoff. But nobody can know the future. There are market-moving surprises that nobody could have predicted ahead of time.

What I do on this blog is post trading set-ups that I have reason to believe have a high edge, and share information from technical analysis about the likelihood of a move continuing or reversing. I make no attempt to predict the future. And remember, even the best trading set-ups lose a significant percentage of the time. Further, even a winning trading set-up can lose through poor execution, failure to set stops, or failure to honor exit signals.