Trading Probability & How It Helps

21/10/2020

Trading probability is quite a key point with regards to trading. Especially as I'm in the process of running my 100 Trades Journal.

I've just listened to a guy called David from the USA, who I had the pleasure of meeting when he visited the UK recently (I say recently - I can't remember if it was early this year or towards the end of last year), who was discussing this very topic on a Facebook live.

It made me think about my current situation while I'm running the 100 Trades Journal and how I'm assessing my trades. I know that I've only been running the journal for a couple of days now and have only completed 21 trades out of the 100 trades - BUT - I've been looking at my trades in the way that David described - almost as an automatic process.

What is the probability of this trade reaching a profit level that I would be happy with?

Now, I know full well that I will have losses along the way. It's got to happen - and I have that expectation. It's reality. It CANNOT be avoided.

Trading Probability

I've used this image because in a way, it highlights what a lot of people think - that Trading is gambling. I mean price has either got to go up or it's going to go down - right? It's just like picking Black or Red on the Roulette table.

No.

That's not how it works.

That might be how you think it works but once you actually learn the skill and you can apply your trading probability to the situation, you are making a decision to place your trade on what is happening in the market - price, patterns, trends, channels and so on.

Take the last two days as an example. I have solely traded the currency pair GBPAUD. Nothing else. I have been watching as price has hit certain levels and then moved into consolidation. I'm aware of many people who would not trade the consolidation. But I did. I was watching for price to start coming down, which it did. I took profit and waited for price to move up again to the top of the channel. I traded the downward move again until it hit the bottom of the channel and I took my profit. I did this several times. I won.... several times.

Don't get me wrong - this is not to boast or to brag, this is an example of using trading probability to your advantage.

The same applies with Harmonic Patterns - it is providing you with a point of potential price reversal. Independent studies have shown that this will work, on average, 80% of the time. That's a fairly high trading probability. So you need to master the skill of recognising these Harmonic Patterns, so that you can add that trading probability to your decision making.

Of course, there is a learning curve - but there are also tools that can help with identifying the patterns, so you don't have to try and work it out for yourself.

Getting Back to Trading Probability

You might hit a losing run when you first get started and then quit because you didn't give it time. You might hit a winning run and feel invincible and then feel crushed when you lose a trade. But if you hit your losing run first, you are gaining valuable experience. The trading probability might well be that your very next trade would be your winner and that could make up for the first batch of losses that you took.

The only way to get on top of your game is to hit these losses, accept them, embrace them and take it as part of your trading education. Once you master your trading probabilities, you will gain an edge and your strategy will have you more profitable.

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