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How to introduce probabilistic thinking into trading?

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Use probabilistic thinking to increase the probability of success.

原文标题：《 Narrative Trading #2: Thesis & Invalidation 》

Original article by 0xkely

Kxp, BlockBeats

Introduce probabilistic thinking

For the rest of this section, I will assume that you have read the previous article. So right now, you might have a project or Token that you're looking at, and you want to know how to evaluate it.

This is where we come to probabilistic thinking, which is not only the basis of all trading, but also an essential skill for any trader whose job is to deal with uncertainty on a daily basis.

Simply put, probabilistic thinking is when we think about events in terms of probabilities. When we don't know all the variables in a situation of uncertainty, we have to make assumptions based on what we know to calculate probabilities for different outcomes, and then bet on the most likely event.

If you have a jar with 99 black balls and one red ball, you have a 99 percent chance of getting the black ball and a 1 percent chance of getting the red ball. Now, you need to take out a ball and guess its color. In this case, if you're using probability theory you're going to guess it's black, because it's more likely to happen.

Now, the thing to note here is that there's still a chance that you're going to draw a red ball, and that's where the expected value comes in. On average, calculating the expected value will help you get the right amount. This is the core principle of trading -- that on enough trades, by taking a slight advantage in your favor (say, 55 percent), you will, on average, have a positive yield (and, of course, a corresponding amount of risk).

Anyway, you can be inThis articleFor a more detailed breakdown of Farnam Street.

Generative view

Now, as CryptoCred says in his video, you trade because you know a currency. If you study it enough, you'll come up with a view that the value of the coin will go up for a variety of reasons.

How opinions are structured depends on what type of trader you are -- if you are a technical trader, you may look at specific techniques that are more likely to yield gains for you (such as smoothing moving averages).

This article is a guide to narrative sex trafficking, so I will focus on a few points of view related to narrative sex trafficking. In my opinion, there are several different types of narrative transactional views:

1. Information/catalyst trading

2. Associate/optimal project transactions

3. "Risky" trades

Information/catalyst trading

These two are the same "types" but differ in the time frame. The idea is that you have access to information that others don't - this is also known as information asymmetry. For example, information trading is similar to knowing AVAX before it decides to partner with Amazon /Shopify. The benefits of these trades tend to be time-bound, because the news itself does not change the asset, so people are only bullish in the short term. Other examples include LDO 2.0, dYdX, Investor delay, and so on.

The problem with information trading is that unless you're part of a team, it's hard to get that information in advance. That's why people pay for services like tier10k to get the news 10 seconds early.

Catalyst trading falls into the same category. When you have more information, you can judge the catalytic effect of trading. For example, if you know BLUR is going to airdrop, you choose to go long LOOKS because you know BLUR will make NFT coins sell big. Another example is the introduction of the dYdX v4 chain.

Associate/optimal project transactions

The trade pattern is well understood - there are always a few currencies that do well in bull markets, and it's whether you can identify them. APTOS, LDO and OP have all performed well in this bull market.

Examples of related-party transactions include LSDS rising in value as Ldos rise in popularity.

The "risk" trade

This is my favorite type of trading because you have to research it -- it's similar to catalyst trading, but the difficulty of getting information is different. That way, as long as you're willing to do the research, you'll have more complete information. Like a VC firm, you bet on something you believe people will start investing in in the coming weeks/months because of its sound "fundamentals."

Examples include going long on CANTO before others knew about it, or going long on MAGIC before others knew about it in the last cycle, for example.

Integrated architecture

I have briefly described the structure of the different types of narrative sex trade. As I said, behind every trade is an opinion, but all of these opinions and insights have an element of uncertainty, and that's where probabilistic thinking comes in. So, after you have an idea, you need to calculate the probabilities for different possibilities.

That's the fun of trading. As you trade more, all kinds of things can happen, so you build your own analytics to determine if a trade is good.

Consider all possible scenarios and consequences and assign different probabilities, such as:

1. Overall macro structure -- 50%

3. Token Research (Founder/Narrative/etc.) -- 50%.

Obviously, this isn't detailed, but you should understand the logic behind it -- the whole analytics system is key.

Locating failure point

Let's say you've found a project you like, done exhaustive research, and are now framing your argument: "This currency is undervalued for a variety of reasons, and I believe it will grow."

Now you must form your invalid argument, which is the circumstances under which your idea will not work. Invalid arguments complement the ideas themselves and must be of the same "type". After all, you can't first say you were long MATIC because they were about to launch zk-EVM and then say you got rid of it because you saw a black cat one day that might spell doom. Your reasons for cancelling the deal must be consistent with your reasons for making the deal in the first place.

To be honest, I'm still working on creating good invalid arguments. The problem with narrative sex trafficking is that it's mostly situational and hard to measure.

I myself tend to look at the role of behavior in trading, such as people's emotions. But sentiment is an emotional indicator that in finance is almost impossible to calculate numerically, so whenever I have to explain to people why it is okay to sell when they are feeling high, it is very painful. They usually ask for data that I can't provide, so in that regard I'm still trying to explore to find an appropriate momentum indicator.

But I would say that a good invalidation argument is the key to knowing when to undo a trade, which is extremely important in Crypto markets where prices can fluctuate wildly at any time.

It has to fit into your trading philosophy, and you have to think about where your point of view will fail, such as when the team changes or when key events are delayed.

These answers constitute your invalid argument.