Trading Odds





How Using Trading Odds Can Improve Your Odds of Trading Successfully

by Christopher Smith

In order to be successful in the world of trading- you need to learn how to think in “odds” of success. Additionally, traders must also realize that you can have 99% accuracy that a certain trade will be a success and still wind up with a loss. Using the odds of success, you can vary your trades based on the odds and deal with losses a little better.

Day Trading Probability for Beginners

While most beginning traders will avoid the idea of probabilities and odds, it is exactly these concepts that contribute to the success of professional traders. Trading is the art of managing risk in the financial markets- a place where nothing is 100% accurate and where nothing will successfully work 100% of the time. (If it did, we’d all be millionaires!)

When you take the time to figure out the probability of success of a trade, you find your “edge” and can increase your chances of a successful trade. When a trading system generates the chance of success of even as high as 99%, there is still a 1% chance that the trade will not be successful. It’s up to the trader to determine where a trade lies on the success scale- if it’s closer to the success side or the failure side, and then based on this knowledge, make adjustments to their trading.

The Trader’s “Edge”

What exactly is “edge” as it refers to trading odds? Consider a casino. You could say they have the winning edge over the players, and that is how they make such large amounts of money even as some gamblers are winning large jackpots. It’s only gambling to the people who spend their money at a casino- to a casino, they have the winning edge, it’s a game off odds and probabilities, and they can expect to keep just under 5 cents out of every dollar spent in their establishment.

Consider a trader a one-person casino. If the trader loses one hundred dollars 20% of the time, and wins two hundred dollars 80% of the time, then they have the edge, and they average a gain of $140 per trade. If on the other hand, the trader is only winning 20% of the time, then they need to improve their system and ratios in order to gain and maintain a better “edge”.

Developing a Trading System Based on Odds

Obviously, it is the goal of everyone who makes trades to become successful and make money. Even expert traders experience losses, since there is nothing that works 100% of the time in the business of trades.

It is impossible to judge whether your trades are successful until you’ve traded for a long enough period of time to create statistics to analyze. With statistics based on your previous trade performance, you can develop a trading system based on odds and gain an edge that allows you to earn more than you lose. The idea is to run a trading business, and not become a gambler at a casino!