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.    

How to Manage Risk: 10 Rules to Keep Your Trading Profitable

Whether you're a budding trader, or you've been doing this a long time; if you haven't learned how to manage your risk, then chances are you've blown out a few trading accounts, or are on the verge of doing so.

Risk management is of the utmost importance for every trader, and should be thought of as the number one reason traders fail at their profession. If you haven't been told, or have simply ignored the advice, I'll lay it out simply for you here:

1. Before you ever place a trade. Know how much risk you have on the table. In other words, how much you stand to lose.

This may seem like a given, but the fact remains that there are many traders who like to fly by the seat of their pants, and focus on how much they stand to make instead of what they could possibly lose if things don't go as planned.

2. Never ever risk more than 1 to 5 percent of your total capital.

This is a hard and fast rule that should be applied no matter what. It is a common trap to allow yourself to risk a lot to gain a lot. This comes with the idea that you're gonna make some quick cash to establish your trading account, and then start following the proper risk allocation once that happens (at least that's what my thinking was like). Well let me tell you, it doesn't happen. If you can't follow proper risk management now, then you won't be able to follow it with more money in your account. If you have a smaller account (less than 75,000) then 5% is okay, but if you're managing above 100,000 then you should risk no more than 1% per trade. You should never feel anxiety or stress over a trade that has hit max loss.

3. Place high probability trades.

This is such a simple statement, but it's another one of those over looked ideas that traders make. Instead of buying OTM options. Try selling them. By simply selling an OTM option you increase your probability of profit enormously. On the other hand, why would you want to purchase anything with less than 50% probability of profit? Not to mention the fact that every day you hold it it decreases in value. It's very closely related to trying to paddle upriver with your hands for paddles. It may work once and a blue moon, but your gonna lose on a consistent basis. If you're gonna buy an option, buy ITM. 

For more ideas on how to make high probability trades you will want to check out this article: 3 UniqueWays to Increase YourProbability of Profit.

4. Don't wait till expiration. Take profits at 50% profitable.

Here is a novel idea that ties in with the last one. Option expiration week can be a crap shoot, and a winning trade can quickly be replaced by a losing one. By placing high probability trades, and taking your profits when you have them, you will not only become consistently profitable, but you will also be seen as one of the smarter guys in the room. Since every trade has a probability of being a loser, and a winner, it's just best to take your winner when it shows up without sticking around. Studies done by TastyTrade have shown that taking profits at 50% provide the biggest edge with the least amount of risk.

5. Place as many trades as possible.

This may seem counter-intuitive, but if you're following rule number 3 you want as many trades placed as possible so that the numbers can fall into place. The more instances you have, the greater the likelihood that the probabilities you trade, will play out. Everyone has winning, and losing streaks. The key is to keep it averaged out so that the losing streaks don't eat into your profit taking.

6. Give yourself enough time to be right.

Since all trades have the chance that it will be both a winner and a loser at some point. You want to make sure that you are giving yourself enough time to be right. This generally means placing your trades from 30 to 60 days out. In the world of weekly options this can seem like a waste of time, but remember, we can successfully manage our risk by giving our trades the greatest chance to succeed, and time gives us an edge that weekly options traders will never have.

7. Use the right strategy for the right environment.

Not all trades are created equal. It is vitally important to keep track of IV Rank (Implied Volatility), and percent change. These two factors can help you gauge whether or not that Iron Condor can best be used instead of a Calendar Spread. Remember, there are a variety of strategies that can be implemented best in certain market environments. Knowing these strategies, and learning how to read the market will give you another edge to keep risk low, and profits up.

8. Don't be afraid to sit in cash.

Sitting in cash waiting for the right set-up can seem like a waste of time when you could be trading. The reality is, that being in cash is a trade, and there are times that it is okay to wait. Being in a rush, and looking for trades that aren't there is a risky endeavor, and has never gotten me closer to my trading goals. You'd be better served to wait for your trade set-ups, or even spend time paper trading (or researching) new ones that will give you more options for more market conditions.

9. Plan your trades, trade your plan.

This is one of those sayings that floats around the trading education scene a lot. It is an extremely important risk management tool though, and you would be hard pressed to overlook it. No business can be successful without a focused plan, and the same holds true for trading, because it is a business. If you don't look at trading as a business, then you need to start doing so. Having a focused and detailed trading plan will provide you with a tool to fall back on in times of stress. Knowing your trading plan, and following through with it will also help you be more consistent, and accountable.

10. Trade with enough capital.

How much capital is enough? Well, it all depends on your trading plan, and what strategies you plan on using. For a small account though, I'd say no less than $10,000. This will give you enough capital to place spread trades that are $5 wide without breaking rule number 1. That means you can implement most strategies and keep your risk down to appropriate levels. More capital is always better though :).

There you have it. Risk management in 10 easy to follow rules. Just don't let your ego/greed get in the way, and it truly is easy. I think I've broken all of these rules at one point or another and have learned the hard way. Greed, impatience, and ego are all things that we traders have to master, and gain control over. Consistently practicing these proper risk management rules will help you overcome your trading pitfalls.

Have you broken these rules? Have a question? Just wanna leave a comment? Have something to add? Feel free to leave something in the comments.