The best way to explain the concept is using the following examples, which involves the game black jack (the only card game I know).
1) Good Process/Good Outcome
The cards you are dealt add up to 12. You have the choice to stay or hit. You choose to hit and receive a 9-blackjack.
The equivalent scenario, in my view, in the stock market is that you see a stock in a downtrend, so, following your rules, you short it. The stock ends up falling another 40% before turning around.
2) Good Process/Bad Outcome
The cards you are dealt add up to 12. You have the choice to stay or hit. You choose to hit and you get a 10 -bust.
In the stock market this is comparable to buying a stock that is in an uptrend, which has recently broken out of it's range on good volume. Following your rules, you buy the stock. Moments after you buy it, it tanks, and you get stopped out.
3) Bad Process/Good Outcome
The cards you are dealt add up to 20. You have the choice to stay or hit. You choose to hit and receive an ace- blackjack.
Comparatively, this is similar to buying a stock that is in free fall. You don't follow your rules, and you just dive into the market. After buying the stock, it miraculously turns around, and you sell at a profit.
4) Bad Process/Bad Outcome
The cards you are dealt add up to 20. You have the choice to stay or hit. You choose to hit and receive a 10 -bust.
Your favourite bank stock is hitting another 52 week low. You feel that the dividend yield is attractive, and, on top of that, the stochastics are oversold, so you decide to 'back up the truck' and double down. One week later, the bank goes bankrupt, and you lose everything.
Every trade I do I feel has a good process. I always follow the same rules for every trade, which include making sure I am trading with the trend, making sure that I am not over-trading, and making sure that I always set my stops appropriately.
However, not every trade I do has a good outcome. But if your process is good (that is, you trade with an edge), then over the long run, you will begin to see the results.
