Most people think that markets are normally distributed. That is, they believe market outcomes are shaped like a bell curve; which is dangerously incorrect.
In fact, markets follow Pareto distributions (or more broadly, Power Law distributions), more commonly known as the 80/20 rule.
Naturally, this reality changes how you should invest or trade in the markets – the question is how?
Readers who have more experience trading would have realized that the dynamic being described in Part 1 is what is expressed in the old trading adage “Cut your losses quickly and let your winners run”.
While “Cut your losses quickly and let your winners run” may seem like simple and good advice, reality tends to be very different, as it is with all pithy market sayings.
What it doesn’t tell you is just how difficult it is to cut losses quickly while letting winners run. Even knowing what to do, our psychological and emotional makeup does not make it easy to actually do it.