High Probability Trading

Afbeeldingsresultaat voor probability

The decision to take control of your financial future is exciting. You have to make many decisions. Decisions include which strategies to apply, how long and which market you are going to trade.  The single most important decision may be trading style: How the trader will select and execute trades. The two most common methods are discretionary and mechanical.

Many people struggle with discretionary trading. This is because of its built-in flexibility and subjectivity. This provides too much room for emotion-driven decisions. Conversely, others struggle with using purely mechanical, automated systems because of their rigidity and complexity. There is a third option that often is overlooked: Probability-based trading.

Definition of High Probability Trading

This is the definition of high probability trading: trading only when there’s a very high chance of your trade being a winner. So what percentage success are we talking about here?  Generally speaking, trading success rates of 60%-80% would be considered high probability trading. Why? Well, it is more than 50% chance of success, isn’t it?

Pinning Your Probability of Profit

Placing high probability trades is actually incredibly easy once you know where to look

And in this video tutorial, we will help you figure out how to pin your probability of success at any particular strike price. We’ll show you how to do this both with probability of ITM and Delta (should you be using a broker platform that doesn’t calculate probabilities for you).

A key point to remember here is that if you’ve done all of the right steps and homework for selecting a liquid stock and the right strategy, then picking strike prices is as easy as figuring out how many times you’d like to win on a trade over time and how much risk you would like to take in the process.

 

Focus of Probability Traders

There are four key inputs to the Probability Model that probability traders focus on: price of the asset,  implied volatility, and days to expiration of the option (DTE) and Probability Of Profit. It then becomes a simple matter to determine the range of prices and the POP based on the expected move for a given level of risk.

 

Which Probability of Profit

Sell options with high Implied Volatility and you will receive much option premium. By selecting the right strategy and selling options a few strikes from the current market price you create high probability trades.

Think or Swim platform and Tastyworks has the possibility to show how likely it is an option is will end up in the money. If your platform does not have this possibility You can also use the option greek Delta.

Options strike near the market value is more likely to end up in the money than options which are further away. A lot of trades are centred around 1 Standard deviation (SD).

If you are using options for consistent income there is a certain risk you take. Of course, you want to take as low risk as possible. With the amount of risk you take comes also the amount of profit you make.  Nowadays it is possible to determine the amount of risk you want to take when selecting options for consistent income.

  • 1    SD representing a 68.2%
  • 1.5 SD representing 90%;
  • 2    SD representing 95.4%

Risk is measured by standard deviation (SD), with 1SD representing approximately 68% chance that the price will fall within that range at expiration.

In case you sold an option 1 SD away from the market price, it is most likely (around 68%) that you may keep the option premium you received. Learn more about this topic by watching the video below.

If you like this post you also might want to read options-consistent-income and watch an episode of  why-high-probability-trades

 

Leave a Reply

Your email address will not be published. Required fields are marked *