Stacking the odds in your favor when investing and trading

Stacking the odds in your favor when investing and trading

What do I mean by high probability trading and stacking the odds in the traders favor?

Let’s explore this.

I would quite comfortably place a trade if there were a 20% probability of making money but the return was earnings to risk factor of 20:1. Meaning for every potential drawdown or loss of $1 I have a 20% probability of making $20.

On the other hand, I also would be comfortable making a trade if there were a 95% probability of making money and the earnings to risk factor was 1:1.

The thing is every percentage that the probability goes down means that the earnings to risk factor have to increase. 

Bottom line the trader needs to be able to trade knowing that the worst-case scenario they can recoup their money and make profit if the worst-case scenario takes effect.

The use of Options can help in this case, to help reduce the risk exposure or increase the earning potential to risk factor etc. There are numerous instruments a trader can use to help mitigate or at least reduce where possible the risk, and increase the rate of return.

In my opinion, it helps to study things like the roulette wheel. I am not a gambler and have never gambled, but I did spend time studying the roulette wheel, as I figured it closely represented the traders market in general. After months of study, I managed to work out how to reduce my risk at the table and increase my return. I then applied these same theories to the market and my trading robots and systems. Imagine if you can consistently win at a negative odds table which is stacked in the houses favor, and take that to the traders market which is a zero sum game….. Imagine the increase in profits where there is substantially more opportunities.

So in short, do your math’s, work out if the opportunity and risk is costing you more than the potential return, and then test your theories on decades of historical data. Then go for it…