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Unraveling theTrading Maze: Uncertainty and Risk, Handling the Unknown.

This is the second installment of a series of publications designed to enhance the knowledge of retail traders by delving into a comprehensive review of crucial mathematical concepts. These concepts are often not readily available in the standard literature used for independent traders' education. The aim is to present them in an accessible manner, steering clear of mathematical jargon and instead adopting an intuitive approach

When delving into the world of trading, it's common to begin by studying some relatively superficial concepts that are taught to us as the foundation of this activity: understanding financial markets, the different types of available assets, how they operate, and even technical and fundamental analysis. However, for those who aspire to truly master this activity, it's essential to go beyond and explore other topics that are rarely mentioned in conventional introductory courses, but constitute the true cornerstone of investments and trading.

Beyond these basic notions lie the fundamental pillars of trading: uncertainty, risk, and certain mathematical principles that govern this practice. These concepts are often overlooked due to their complexity, but ignoring them is denying oneself the opportunity to truly understand the terrain in which we move and risk our capital.

 Risk and  Uncertainty

To begin, the distinction between risk and uncertainty is crucial. While risk implies the possibility of known and quantifiable outcomes, uncertainty arises when outcomes are unknown or unpredictable. In a world of risk, traders can use tools to manage the unknown; in a world of uncertainty, they are at the mercy of chance.

Consider two scenarios: when investing in an established company, we can calculate the probability of its future returns; conversely, when financing a technology startup, we face total uncertainty about its success. Risk management allows us to make informed decisions in a predictable environment, while uncertainty requires a more qualitative and flexible approach.

Understanding these fundamental concepts leads us to explore deeper topics such as probability, statistical dependence, and volatility. Although these concepts may seem daunting, they form the basis of a mathematical framework that allows us to navigate the world of trading with greater certainty and control.

Handling the Unknwon 

While it's impossible to predict market movements with absolute certainty, we can calculate the probability of certain outcomes and manage our risk accordingly. This perspective allows us to move from the realm of the unknown to the realm of the manageable, gaining invaluable competitive advantage in financial markets.

It's important to note that success in trading is not reserved exclusively for mathematical experts. While these professionals have an undeniable advantage, retail traders can also thrive by professionalizing their approach and deeply understanding the fundamental principles of trading. However, it's an undeniable fact that the probability of success based solely on intuition or technical analysis is low, which may explain why statistics show that the success rate among retail traders does not exceed 10% to 15%.

In conclusion, by delving into the underlying concepts of trading, traders can improve their understanding of the market, better manage their risk, and increase their long-term chances of success. At the end of the day, trading is both an art and a science, and those who master both aspects are the ones who reap the greatest rewards in this exciting field.

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