It is common to see web site banners or other advertisements similar to the title of this article, touting the benefits of options trades with probabilities of success of 85-90%. Technically, these trades indeed have a high probability of success, i.e., if you placed a trade with the same parameters every month of the year, you should see about 10 or 11 trades per year be successful and one or two be losers. And the longer you traded in this way, the more likely your results would conform to these averages.

The underlying probability calculation assumes that the stock price movements are random events, like throwing dice. Of course, stock price movements are not purely random, but are affected by news, rumors, crowd psychology and many more factors. But it isn’t a bad approximation for the reality, especially when averaged over many stocks and over long periods of time.

The essence of the problem derives from the old financial adage, there’s no free lunch. If you were to establish trades with these probabilities, the returns will be rather small, of the order of 7% to 10%. But the losses would be huge, of the order of 90% to 100%. The bottom line is that the one or two losses each year would be large enough to wipe out all of the gains for the year. Thus, there is only a small probability of a losing trade, but when it happens, it will be a devastating loss.

Some traders will readily acknowledge that these high probability trades don’t make sense, and will sell the idea of so called “low risk” trades, where the potential loss is small, hence the label of low risk. These trades are simply the mirror image of the high probability trade. The low risk trade is characterized by a huge potential gain, of the order of 200% or more, but there is a very small probability of that successful outcome. In this case, one would lose a small amount on the trade 10 or 11 months out of the year and then have 1 or 2 large gains. The problem is that the large gains would not compensate for the large number of small losses.

In either case, the outcome is the same, a small net loss, especially after commissions and other costs of trading. So is options trading inherently a losing game? No, not necessarily, there are many examples of successful, long term options traders. They succeed by paying attention to two critical factors: 1) keeping one’s ratio of winning trades to losing trades as high as possible, and 2) minimizing the losses on the inevitable losing trades. But those topics require a much more extensive treatment than can be done in a short article.

One’s choice of either the high probability trade or the low risk trade is not a financial issue – neither is inherently superior. Neither trade will be successful long term without other considerations. One’s choice of the high probability or the low risk trade is primarily a matter of matching one’s trading style and risk tolerance with the right trade.

Many people enter trading, whether it be stocks, options, commodities or other markets, after having been very successful in their primary occupation. Many of these new traders are perfectionists by nature and driven to be successful. This often leads to a couple of fatal flaws in trading: 1) The novice trader stays with a losing trade too long because of a reluctance to admit the original analysis was incorrect. His or her ego and sense of success are intertwined with the trade. 2) The novice trader does not understand that losing trades are a necessary cost of doing business.

The reality of the trading business is that a large percentage of one’s trades will be losers. Every business has overhead expenses, or costs of simply opening the doors for business. Trading is no different and trading losses are a large part of those overhead expenses. Once one accepts that aspect of trading, it becomes much easier to close losing trades early with minimal emotional attachment. It is also crucial to post audit your trading every month. I evaluate each trade that lost money and categorize it as a “losing trade” or a “bad trade”. The bad trade is the one where I did not follow my own trading system rules, whereas the losing trade was executed and managed correctly, but simply did not turn out positively – it was part of my overhead.

The precise percentages of losing trades will depend upon the markets being traded and also the particular trading strategy. For example, many successful commodity traders will only have 30-40% winning trades. At first blush, that doesn’t appear to be a viable proposition, but the key is the ratio of gains on the winning trades versus the losses on the losing trades. For example, let’s assume my trading system’s average winning trade returns $250 but my losing trades average about $500. That doesn’t look like a winning system, but the crucial missing piece of information is the ratio of wins to losses. If I win 10 of the next 12 trades, I will gain $2,500 and lose $1,000 on the two losing trades for a net gain of $1,500.

Another trading system might have a different pattern, e.g., winning trades average a $750 gain, but losing trades average losses of $100. This pattern of wins and losses is fine if the probability of success is high enough to make up for the losses. For example, if my probability of success is only 20%, this system will be profitable. Out of the next ten trades, two winners would account for $1,500 while the eight losers would total $800 in losses, for a net gain of $700. Always understand the risk/reward ratio of your trading strategy. Couple that with the probabilities of success and loss to know the expected value of a series of trades using this system. Depending on the parameters, one system will be profitable with infrequent, but large, winning trades, while another profitable system may be characterized by highly probable, but small, winning trades. This explains why you often hear a trading guru adamantly insist that you must always trade where the maximum gain is at least three times the maximum loss (a low risk/reward ratio). But then you hear another well known trading coach tell you that the best trading strategies are the ones with probabilities of success greater than 85%, with a high risk/reward ratio. Nether system is superior. But each system has its own pattern of wins and losses and optimal trade management. Which system is most compatible with your trading style and risk tolerance?

The share trading market instantly conjures up pictures of wealth being created and lost. A “share” makes its owner a part owner of the company. Various types of shares, also sometimes referred to as stocks, have different rights associated with it. The main objective of share trading is to make a profit. If you are able to sell your share at a higher price than what you had paid for it, you make money.

However, it is important to remember that you are also incurring a risk in investment in a company share. As long as you are the share holder, you are entitled to a part of the company’s profits through dividends. Countless people have gotten rich through share trading but countless others have lost millions as well. There is no formula to be successful in share trading; every move you make has a risk associated with it.
How Is the Share Trading Conducted?

If you’ve never been involved with share trading before, then you’ll be surprised to know that buying and selling the shares by yourself is not allowed. To get an investment portfolio, you need to get the services of a qualified broker. Basically, there are two types of brokers namely the non-advisory broker and the full-service stockbroker.

The non-advisory broker will merely buy and sell according to your instructions. This type of broker charges lower fees because he does not provide auxiliary services. You need to conduct your own technical research and market research to find out which shares have the potential to become profitable. You can reach the non-advisory broker through phone or the internet.

Meanwhile, the full-service broker is called as such because this broker can provide investment advice and trade the shares on your behalf. Although this type of share broker charges higher fees, getting this service is worth considering. Aside from the fact that the broker will conduct the technical and market analysis on your behalf, you will also benefit from his market exposure, network contacts, and years of experience in the industry.

How Long Should You Keep Your Investment?
Depending on your financial health, the amount of investment you should put in the share trading should only be limited to the amount you can afford to lose. This is because despite all precautions, the share market is still very much volatile and unpredictable. It is important not to tie up all your money in share investments. Leave as much as possible in your savings, securities, and less risky investments.

There are two main types of investing in this market. The first is called the “Buffett-style of investing”. In essence, you will keep the share because of its long-term potential rather than quick profits. The investor buys with the intention of keeping it for several years while enjoying the dividend. The other type of investing is to trade the shares quickly. Although buying and selling quickly is risky because the value of shares cannot be predicted in any given time, it is possible to make a fortune doing this.