How to Trade for Success: 3 Unique Ways to Increase Your Probability of Profit

In the wonderful world of trading (and any business for that matter), profits are king. If you're not taking in consistent profits, then you're not doing your job as a trader. It's a simple business model, but it lies at the heart of every successful enterprise; Keep profits up by placing trades that give you a high probability of success. The only problem is; how do you know the trades your taking have a high probability of winning? Well, that's why I'm here. I'm going to give you some easy to follow guidelines that will help you achieve that goal.

Before I delve in. I want to pose a few questions that you should be thinking about as you read on: What do you define as high probability? How do you spot, and place trades with a high probability of success? How do you define consistent profits?

Okay, lets begin.

1. Recognize that limited profit trades have a higher probability of success than unlimited profit trades.

As a trader just getting started out, I learned about the difference between limited profit trades, and unlimited profit trades. When thinking about these types of trades, it is important to distinguish that we are speaking in regards to profit potential, and not what could actually happen. I mean really think about it, there is no trade where you will have an unlimited upside, and leave on forever. It's all about the potential though, and that's what threw me for a loop when I first started trading options. I figured that limiting my potential profit was probably the stupidest thing I could do, and wanted to only learn the trades that gave me an unlimited upside in terms of profit potential.

The problem with this thinking is that the trades that offer the tasty unlimited potential temptation, carry the most amount of risk. High risk equals high reward right? Well that may be very attractive in theory, but every successful trader out there knows that in order to make it, they must limit their risk as much as possible while still maintaining a decent profit curve. Doing so allows the trader to stay in the game, and increase their odds by giving themselves enough chances for the numbers to play out (see # 2). Remember, high risk may equal high reward, but it also lowers your probability of success by putting your capital at risk. The longer you can keep making trades, the better your odds of success will be.

All trades that limit your profit potential also limit your risk, which naturally places you in a position to increase the odds in your favor. So in essence, these trades do your job pretty much for you. You just have to know when to place them, and how to manage them once they become profitable. If you stick to proper risk management rules (read Howto Manage Risk) then you'll only ever have to worry about managing your winners, and you'll be able to stop stressing over your losing trades, and thus increase your probability of success.

2. Know the percentage chance that your trade will be profitable.

Now this may seem like it's voodoo to those who don't know how to do it, but every option chain offers this information in some form or another. In the ToS platform, they provide metrics that will show you probability OTM, probability ITM, and probability of touching. These come in very handy. It's as easy as changing the settings of the option chain, and they become visible for every option you look at. If you don't have these metrics available through your broker/platform, then you can always gauge the probabilities by the Delta. You just have to look at Delta as a percentage scale, and your golden. For example, if an option you're considering is Delta .30, then that option roughly has a 30% chance of expiring ITM, or 70% of expiring OTM.

Imagine how much your trading will change when you can look at that OTM option you're thinking about buying, and realize that the probability of it staying OTM is 80% in the current market environment. Yea, that option may be cheap, but it's cheap for a reason, and suckers like you have been taking that bait for years in hopes that your cheap investment will turn into a big winner; when the reality is that there is only a 20% chance that it will become profitable. Ouch. Want the bleeding to stop? Then stop placing trades based on price, and start placing them based on the probabilities that they will become profitable. Place enough of these trades, and over time your equity curve will thank you.

3. Focus on managing your winners, not your losers.

This was mentioned a little earlier, and it's a concept that is taught in very few places, but it's catching on because it actually works. The general knowledge base would have you focus on managing the losing trades with very little emphasis on what to do with winning ones. Well that way of thinking is outdated, and frankly does not work. As I stated earlier, if you're following proper risk management rules, then you never have to worry about your losers (provided you're also following #2), and you can shift your focus onto what it should be doing in the first place; profit taking. After all, you do want to be in the business of making profits right?

So how do we manage our winners? The answer is simple. Take your profits when you have 25 to 50 percent of your max profit potential. Yes, you read that right. Don't get greedy, and don't risk taking your trade to expiration. There are too many variables at play, and every trade stands to be a winner, and a loser at some point in time. So if you're making high probability trades (anything above 65%), and taking your profits when you have them, you'll be increasing your probability of success dramatically.

There you have it. 3 Unique ways to increase your trading success, by focusing on probability of profit. I know these ideas work from first hand experience, and if I can profit from them, then so can you. If you have anything to add, or have any questions you would like to ask, feel free to leave something in the comment section below.