Way of the turtle

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Way of the Turtle

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event. This is how insurance companies make money: They sell
policies to cover risks for less than the probable cost of payout under
those policies.
Trading is much the same as insuring against uncertain risks.
Trading is filled with uncertainties. You do not know whether a
trade is going to make money. The best you can do is be confident
that the rewards will outweigh the risks over the long run.
Thinking in Probabilities
Many of you took probability and statistics courses in high school
or college. No doubt you would have seen a graph like the one
shown in Figure 4-1.
Figure 4-1 shows what is known as a normal distribution. This
particular graph depicts the distribution of women’s height. The
Think Like a Turtle 
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Normal (Gaussian) Distribution
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Cumulative Probability
Probability Density
Figure 4-1
A Normal Distribution of Women’s Height
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bottom axis shows the height in inches, and the side axis indicates
the two aspects of probability:
1. Probability density graph: The shaded area uses the legend
on the left and shows how likely a particular height may be.
In this case, the average height is 5 feet 4 inches. The
probability of a woman’s height being closer to that average
is greater than its probability of being farther away. The
higher spots in the middle of the graph indicate the most
likely possibilities, and the lower height areas toward the
sides indicate less likely possibilities. For example, the
height of the curve at 70 inches is much lower than it is at
68 inches, indicating the lower probability that a woman
will attain a height of 5 foot 10 inches compared with a
height of 5 foot 8 inches.
2. Cumulative probability curve: The solid line runs from 0
percent to 100 percent and uses the legend on the right. It
shows the cumulative probability of a woman attaining at
least a particular height. For example, if you look at the
green line, you can see that it reaches almost 100 percent at
about the 70-inch level. The actual value at 70 inches is
99.18 percent, meaning that less than 1 percent of women
are 5 foot 10 inches or taller.
This graph and others like it use complex mathematical formu-
las, but they all represent a simple concept: There is a decreasing
likelihood of a woman attaining a particular height the farther away
that height is from the center that represents the average.