The risk-reward ratio is one of those things every trader and investor acknowledges and talks about. A third aspect that gets less love is probabilities. Not only do we want a good risk-reward, we need above average probabilities to place a trade.
3) That is where trading edges lie
Don’t get me wrong, i’m all for keeping an open mind once in a position. However, one of the hallmarks of underperformance is striking out on trades even though you get the market right.
How do you improve your probabilities? Make use of your tools:
- Technical tools
- Bollinger Bands are just one example of an invaluable tool if you know how to use them.
- Common Sense/Critical Thinking – Know where and why buyers/sellers show up
- A stock sells off on earnings or news that doesn’t affect the larger thesis – that’s a situation where investors would step in.
- It’s not that simple though, what catalysts are coming in the near future? Is there more risk(uncertainty) on the horizon in the short term?
- Is there emotion in the market?
- Follow Options Activity
- Big market players making big bets in front month options tend to tip their hand.
- If you see a stock at or near a buy point with action coming in, odds are increased that your stock will move soon