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
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