At investment conferences, the hottest speakers are those who provide information about high probability entry techniques. If you say, "Trade with the odds on your side" and show someone a technique that is right 75 percent of the time, you'll get a large audience. Yet, most techniques of this nature usually have big losers and may not even have a positive expectancy. Nevertheless, being right 75 percent of the time is all it takes to get people to trade using techniques that tout this type of performance.

How important is it for you to be right? Let's say I could guarantee that you would make money by the end of the year -- lots of money -- but you would probably lose money on 90 percent of your trades. Would you like that? Could you tolerate that? Would you accept that?

Most people would probably answer "No" to all three questions. And, if that is you, you are probably denying yourself the opportunity to make money simply because being right is more important to you than making money.

Some of you might be asking, "How could you be wrong 90 percent of the time and still make money?" The solution goes back to the golden rule of trading, "Cut your losses short and let your profits run."

Let's say that 90 percent of your trades lose money and that your average loss is $100. On the year, you make 100 trades, so you end up losing 90 of them for a total loss of $9,000. However, let's also say that your average winning trade is a big R-multiple.

It's an R-multiple of 100 or a $10,000 winner. You have 10 of those in a year, so you end up making $100,000 on your winning trades. If you subtract your winnings from your losses, you end up with a profit of $91,000 at the end of the year. You make $91,000, yet 90 percent of your trades are losers.

My guess is that 99 percent of the trading population could not trade a system that would produce those kinds of results. This is because, using this system, they wouldn't get to be right enough. They'd feel they were having too many losing streaks.

Or, for them, the magic number is more than five losing streaks in a row. Most people just cannot tolerate long losing streaks, so when lengthy losing streaks occur, they totally abandon what they are doing.

Using such a system, you could easily have 25 consecutive losses. At that point, you might become certain that your system is broken, and you would try something else.

Let's look at the opposite end. Suppose you got to be right 90 percent of the time. Suppose your average win was $100 and that your average loss was $2,000. This means that you'd have a total of $9,000 in winnings and $20,000 in losses. You would lose $11,000. Would people trade that system? Yes, they would. They would probably trade it for a number of years until they went bankrupt. Why? Because they got to be right most of the time and that can be very rewarding.

By now, you might be asking, “But, how could people possibly tolerate losses of $11,000 after 100 trades?” It is easy; they turn losing trades into long-term investments in their mind and say, "It's only a paper loss."

For example, I've had workshop attendees who were probably way above average in terms of sophistication. However, I asked them to raise their hands if they had an investment in their portfolio that was only worth 50 percent or less of what they paid for it. Eleven people raised their hands -- more than a fourth of the class. And, my guess is that, among the overall population of investors, most people are sitting on a number of big losers, hoping they will come back. Why? Because they cannot stand to be wrong on an investment, and they are waiting to be right on those losing trades.

What is the cost of having losing investments in your portfolio? It's major. First, you are using valuable capital up with nonproductive investments. Second, you are missing many good opportunities.

Two Reasons Why Being Right Seems So Important

There are two primary reasons why we focus on being right. First, we are conditioned to be right by the school system. Second, everyone in the trading industry gives people what they want -- ways to be right -- which tends to perpetuate the myth. Let's take a closer look at these two reasons.

First, we are conditioned by the school system to the importance of being right. In school, you were taught that there are right and wrong answers. What was a right answer? If you learned how to survive in the system, you learned that a "right" answer was whatever the teacher wanted you say.

At school, your performance was measured periodically through tests in which you were asked to pick the right answer. If you couldn't get more than 70 percent right on the test, you were labeled a failure and ostracized. Your humiliation might even have been in public in front of all your friends.

And, if your humiliation wasn't public, it was most certainly semipublic. Your "poor" performance went home in the form of a grade with a comment that "Johnny is a little slow” or “Johnny is bright, but he just doesn't try." Usually, at this point, the most important people in your young life got involved -- your parents.

Even if you understood the system and worked hard to know the right answers, you still might have been taught that your performance was not good enough. It usually took 94 percent right to get an excellent grade. How many children went home and showed their 94 percent test grade to dad only to get the response, "Why didn't you get 100 percent?"

Thus, it is no wonder that traders want to be right all the time. And, being right usually costs them dearly in terms of profits. Whether you've been through 20 years of schooling and have a graduate degree or less than 10 years of schooling, you still have the same conditioning about being right.

The second reason people want to be right is that service providers for traders and investors feed the bias to be right. Software vendors tend to provide systems that can be highly optimized. Once you've optimized your trading, you can lay a line over the prices and see exactly where you should have bought and sold. It seems obvious. However, the same optimized system does very poorly when applied to the real world.

The Solution: Expectancy

What you must do now that you are trying to survive in the real world is learn about expectancy. By definition, expectancy is how much you can expect to make, on the average, over many trades. Expectancy is best stated in terms of how much you can make per dollar that you risk.

I cover this important topic as well as detailed instructions on how to calculate expectancy in my book. My objective is to show you how to incorporate expectancy into a successful, profit-generating trading system.

* Reprinted (and modified) with permission from Van K. Tharp, Ph.D. of www.tradingeducation.com