One of the things both frustrating and interesting about the daily machinations of life is the sheer inconsistency of it all. We want “things” to be the way we want them, and they are at times, but then, at other times, things are just the opposite of what we want them to be. For example, I have told you I strive to keep things simple, and, for the most part, I am successful, but then, someone asks me a question such as the one below.
How can you define the probability/odds of a trade?
On the surface, the above question seems simple, and, in fact, if I choose, my answer could be as simple as, “It’s complicated.” But answering so simply is an injustice to the person who took the time to write me with the question. So, I will answer the complex question as simply as I can, without becoming overly complex …
In my opinion, it is less about the actual probability/odds of a trade; rather it is about estimating whether a trade will work or not, which is essentially the same thing. Now, I will get legitimate arguments on this statement, as there are many who follow systems that actually do define the probabilities of trades, but I don’t follow any of these systems, so I will talk about what I know.
Yes, I, and many others look for “high-probability, low-risk” trades, but this phrase doesn’t actually imply numbers; it means gathering information and assessing risk, defining potential trades and then confirming those potential trades with more information. And this is where it becomes complex, as the trading/investment world is packed full of information coming at us in the forms of technical indicators, company financial information, global economic information, global fiscal information, global company “stories,” and the ubiquitous global news, all of which traders and investors rely on to find and confirm high-probability trades.
Ultimately, finding and confirming trades that are likely to succeed comes down to analysis, and now the merely complex becomes the ultra complex. Starting with technical and fundamental analysis, the process of finding and confirming trades that are likely to succeed winnows down to trading approaches such as systems, automatic or not, strategies, complex or simple, and in this day and age, approaches dependent on software.
All of these approaches employ technical analysis, fundamental analysis, or a combination of both, and with today’s software, analyzing for potentially successful trades is easier than ever, thanks to such pioneers in trading software as Louis Mendelsohn. His contributions of intermarket analysis combined with neural networks, software backtesting, and utilizing software for analysis allows for analyzing the myriad data available, and then formulating predictions about prices and trends based on that analysis. If the software is good, it will generate potentially successful trades, and it will provide technical indicators to confirm those trades. You, however, need to put that information into the context of the rest of the global information coming at us. This, in combination with powerful software allows traders to “define the probability/odds of a trade.” Or, in terms that might be more accurate, the above allows traders to find and confirm trades that are likely to succeed.
Trade in the day; invest in your life …
