To Underestimate The Probabilities Of The Impossible

You hear it all the time...."that will never happen its impossible". When you think about that for a moment you realize that in trading only an idiot would say such a thing. Unfortunately we all do at some point and even the top traders and top funds do it all the time. Lets take a look at a simple scenario: Suppose I somehow became a math genius and somehow worked at a top firm on Wall Street, and in a moment of genius I come up with a way to make $100 99% of the time, but in a small 1% chance I stand to loose $50,000. Would you run a system with that kind of odds? We can calculate this easily by using what is called the mathematical expectation. 99.9%*100-0.1%*50000=-401

As we can see even with such a small chance this system would still loose $401 a trade on average. This happens everyday, real traders blow up like this all the time and as we just saw even big funds do it to.
The moral of the story? Never underestimate what most would consider to be impossible, the impossible happens everyday.