What does the law of averages imply about large sample sizes in trading?

The law of averages suggests that as the size of a sample increases, the outcomes of that sample will tend to cluster around the mean or average value. In the context of trading, this means that when a trader analyzes a large number of trades, the results will likely be influenced by the overall average performance, rather than being overly affected by outlier results or random fluctuations. Therefore, most of the trading outcomes will be close to this average, providing a more reliable understanding of overall performance.

This concept is particularly important for traders because it underscores the benefit of accumulating a sufficiently large data set. It can help with the identification of reliable patterns, trends, and strategies that are difficult to ascertain through a smaller sample size, where random anomalies might create misleading interpretations. In essence, while individual trades may vary, over time and with larger sample sizes, the results will reveal a tendency to converge around the average outcome.