The Traders Journal

Investing: The Probability Tool


Investing and thinking in probabilities should go hand in hand.  Probabilities can be expressed both quantitatively (as a percentage from zero to one hundred percent) or qualitatively.  I use both, but recently I have found myself gravitating more to qualitative assessments and descriptions.

Determining the precise probability of any particular trade working out is always subjective.  In evaluating a trade’s potential, I find that it’s somewhat unreasonable to pin it down with a specific probability label of say, 75%, for example.  Such an exact number implies a mathematically accurate calculation, and as all experienced traders will tell you, that is hardly the case. 

When assigning a probability label to my own trades and when discussing investing probabilities with my students, I gravitate to certain qualitative labels that are open to individual interpretation and imply an encompassing of probability ranges rather than a specific probability such as 75%.

The six probability descriptions I have found useful are these: (1) Highly Likely; (2) Probable; (3) Possible; (4) Improbable; (5) Highly Unlikely; and (6) Virtually Impossible.  Your own labels might be similar but different.  I suggest you use what you are most comfortable with in your own trading and amongst your own personal investment circle.  

A closing thought – wouldn’t it be more valuable if those hot shot Wall Street analysts who follow our favorite stocks and set specific price targets were also required to go out on a limb and label their projections with a Highly Likely, Probable or Possible call?  But then again, I believe in Santa Claus. 

Trade well; trade with discipline!
-- Gatis Roze 

P.S. Click HERE for information on my future appearances & seminars.



Gatis Roze
About the authors: , CMT, holds an MBA from the Stanford Graduate School of Business and is a past president of the Technical Securities Analysts Association (TSAA). He is also the co-author of Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016). A full-time investor for over 25 years, Gatis has taught sold-out investment courses throughout the Pacific Northwest and beyond since 2000. Learn More

Grayson Roze
is the author of Trading for Dummies (Wiley, 2017) and Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016). He has worked in the financial services industry for since 2012, and now serves as the Business Manager for the company. He holds a Bachelor's degree from Swarthmore College. Learn More
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