Many traders look at the phrase “high probability trading” and find it intriguing since much of their experience with trading has yielded the opposite result. Since many new traders equate success with being right more often than they’re wrong, it’s natural to want to find ways to be right more often. However, having a high probability of success on a given trade has less to do with what technical parameters are being used and more to do with the types of strategies being implemented.
Unfortunately, buying stock alone will make it difficult to be right a high percentage of the time. A stock has a 50/50 chance of moving one way or the other, and the minute you attempt to restrict its movement, with some sort of exit strategy, your odds can go down from there. High probabilities are achieved through option trading where the stock can move against you yet still allow you to profit.
While options are a means to maintain a high probability of success, all option strategies will not yield the same result. High probability option trading involves strategies like short out-of-the-money verticals, calendars, iron condors, etc. that place the trader in a position to profit even if they’re wrong on the direction of the stock or possibly the timeframe. Even incorporating things like implied volatility analysis can help one decide which strategy might provide the better odds. Also, using multiple strategies on the same underlying can help traders determine how often they want to be right over time and the accompanying reward/risk. There are laws of the trading universe that lower the ROR as the odds are increased. If you’re looking for unlimited potential gains on any given trade, go buy an out-of-the-money call or put option and see how you do over time.
What high probability option trading provides is a home for those that want leverage, satisfy the need to improve proficiency and smooth out returns. We’re not all pure speculators, and as such, many will find a home with a portion of their portfolio using this style of investing. Hopefully the topics discussed here will put you a little closer to finding your identity as a high probability trader.