How To Use The Probability Rule To Increase Your Day Trading Profits

Cobra Trading
Nov 8, 2021

The probability rule is tricky. If you flip a coin 10 times, you know that you have a 50/50 chance of getting heads. Does that mean that you’re guaranteed to get five heads and five tails?

Obviously, it does not. Furthermore, there is a chance that you may get ten tails in a row, and it would still not contradict the probability rate. The rule applies to a larger pool of attempts. Say, if you flipped the coin 10,000 times, your result would be closer to the theoretically correct 50/50 split. 

The same applies to the trading odds. Say, your strategy has a 60% success rate. However, that does not mean that you are guaranteed six wins and four losses on your first ten trades. You may have a winning or losing streak. But the odds will hold up if you zoom out and look at the big picture by considering 100 or 1000 trades. 

This is why it is so important to stick to your strategy. Unfortunately, many traders let their winning or losing streaks affect how they execute their plan. Some start changing things up on the go or take smaller wins in fear of the trade going against them. But you have to remember that the probability of success works in tandem with your risk/reward ratio. If you change any part of your strategy, it is not the original plan anymore. You’re effectively testing out a new strategy with every new trade you enter. This is how a good plan may end up losing you money. 

That’s why it’s so important to remember the big picture. As long as you have a well-researched and tested strategy, the odds should be true in the bigger pool of trades. So don’t let a random streak within a particular small set of trades sway you. 

There’s a saying in Vegas that the house always wins. It can be explained very easily using the probability rule. Each player has a chance to win, but many leave before hitting their odds within a big enough pool of tries. Multiply it by the number of people entering and leaving the game, and now you know why the saying is true. 

Well, you can become the house in that metaphor. As long as you’re staying for both losses and wins as you let the odds pan out, your strategy should bring you the desired result.

Another mistake that some traders make is skipping out on trades out of fear and hesitation. This is how they may be losing out on potential wins and earnings. 

Understandably, new traders may get nervous if multiple trades go against them. However, that’s not a good reason to switch your strategy on the go. Consistency is always the key. That math will change once you start adjusting the risk/ reward ratio without a proper plan, and you may get worse results than expected. 

So if you don’t have the confidence in your strategy and don’t want to risk any more money, consider returning to the paper trading stage. You can explore things risk-free and familiarize yourself with the trading process. This way, you still get to collect data and see how the math plays out without putting your account in jeopardy. 

Another way to minimize your potential losses is to reduce your position. You still get to experience the real emotions of the trade and see how the odds pan out while risking very little. That’s a great way to get more comfortable with your day trading strategy and build up some confidence. And once you have trust in the process again, you can gradually increase your position and get back to growing your account.

 

Learn more about developing a winning day trading plan and see what other educational resources we offer at Cobra Trading.

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