Are You Trading The Probabilities? This Is What It Really Means And How To Do It

I think it’s important to spend quality time thinking about the common knowledge that gets passed around. Those phrases are often meaningless and people have no real understanding of what they actually mean. Or, worst case, they misinterpret it completely wrong and it harms their trading.

Today, I want to share my view on the term “trade the probabilities” and why I think that most traders don’t do it, although they will tell you otherwise.

What does “trade the probabilities” really mean

When traders say that they trade the probabilities or that you need to do that, they usually mean that as long as you have a ‘winning’ system, you will make money even if you have a few losing trades over the short term. In essence, that is a good approach and the right mindset to be in; just focus on making the best trades and, over the long term, you will come out ahead.

By the way, having a trading ‘edge’ means the exact same thing. An edge is an advantage or a skill that shifts the odds in your favor so that you can trade with a positive expectancy. An edge can come in different forms: from psychological resilience, to risk management skills, great understanding of technicals and price action, or being able to interpret fundamental data in a meaningful way.

The meaning is always the same: trading in a way that allows you to generate positive returns by following a repeatable process.

The most important word for you in trading: Repeatable

But what all this really boils down to is following a repeatable approach and process in your trading. The importance of this cannot be stressed enough and it will determine the success of your trading career.

Having a repeatable trading approach means that you have clear rules in place for your trading. And this goes all the way from scanning markets, to finding entries, sizing positions, managing trades, exiting trades and journaling them later on.

I have said it so often here before but let me repeat it one more time:

The amateur wants consistent profitable results BEFORE he will follow a consistent approach. The professional has a consistent approach before he expects to make positive returns.

Amateur and struggling traders jump from system to system, take random trades they shouldn’t be in, don’t have rules at all, listen to other people’s opinions and are all over the place. Following such an approach, it’s impossible to ‘trade the possibilities’ because you cannot reproduce the results and the results will be all over the place.

click to enlarge | Read more: When NOT to trade

Tips for generating repeatable trades

For long-term success (or at least the chance for success), you have to create a structured trading environment for yourself that allows you to have consistent results. This does not mean that you will automatically have profitable trading results, but you will be able to make targeted adjustments and steady improvements over time.

Here are my top tips for creating a repeatable trading process:

• You have to know your system inside out. From the market conditions it works best in, to the timeframe and market selection, when not to trade, the tools and indicators you use and why, to how you react to changes. And of course, when to break the rules 🙂
• Before you start your trading day, write trading plans for each market/pair that you want to trade. Determine when and where to enter and under which conditions
• In that context, I always recommend writing down your personal trading rules. I have put my own trading rules on a piece of paper and before each trade, I go through the points before I enter a trade.
• Have rules for risk management: How much % of your account do you risk per trade? Do you add to trades once they are on and if so, how much and when? Avoid inconsistent position sizing because it will burn your account. Always know what you are going to do in  advance
• Have rules for trade management: When and how do you move stops? Do you watch charts during the trade duration? How do you make sure to avoid emotional fiddling around with your trades?
• Have rules for trade exits: When do you exit trades and how do you determine trade exits? Minimize emotional trade exit decisions and allow winners to run if it makes sense.
• Know how to do your post-game analysis: when you enter your trades in your trading journal, how you review the trades, which things you work on at any given point and how to make sure that you keep improving.

There are a few more points, but you get the idea. The goal is it to create a professional trading environment that allows you to have a consistent approach and understand what is going on in your trading. Only then is it possible to improve as a trader over time.

You have to create a trading approach that allows you to take the exact same trade over and over and over and over again. This is especially true if you are a technical trader. Eliminate all the noise and trade your ONE system without distractions.

Non-repeatable situations

Now that we have a good understanding how to create a better surrounding for yourself, let’s take a look at a few Dont’s and things that make it impossible to ‘trade the probabilities’. But instead of beating yourself up, be honest to yourself and try to eliminate as much from your trading as you can:

• Changing trading methods and systems all the time
• Even changing indicators or settings often will ruin a trader’s approach
• Listening to other people’s opinions and then making trades based on random comments
• Suddenly making a news trade even though you never trade the news
• Always changing between position size in your trades
• Revenge trading after a loss even though you have no signals
• Breaking the rules and jumping in too early because you don’t want to miss out (FOMO)

Those are the cardinal sins in trading and you need to make sure you eliminate them. Any one of them will create meaningless trading results because you cannot interpret them.

Many traders believe that their system isn’t working when, in reality, they are not even following their system and just taking random trades. Those random trades need to be avoided at all costs because they mess up your mindset and the way you look at your trading results. You might have a promising trading strategy at your hands but all the trades you shouldn’t be in are erasing your profits. This is such a big problem in trading and it causes trading failure and problems for many traders even after years.

[bctt tweet=”Many traders believe that their system isn’t working when, in reality, they are not even following their system. Understand your trading!” via=”no”]

Always, always stay consistent when it comes to making trading decisions so that you have a chance to trade the probabilities.

Here is a webinar I gave where I talked about trading emotions and how to manage them with very practical tips.