The Road to Successful Trading

Identifying High Probability Trades 
 
Central to successful trading is the technical skill of identifying high probability trades. What we 
mean by “high probability” is a trade that has a higher than chance probability of being a winner.
We are not talking about “hitting the home run” but hitting for average. If your trading objective is 
to make at least 9% on each trade, then you are willing to get out of the trade at that point. Often 
times, even a fairly conservative trading strategy can consistently yield such returns. Using a trading 
strategy such as writing covered calls or using vertical spreads can produce such results. As 
mentioned, trading is not about the big winners but the small consistent winners that add up over 
time to become very impressive annualized returns. For example, if you use a strategy that produces 
a 7% monthly net return, that translates into an annual return of 84%! Little frequent victories win 
the war. 
It is important to mention that essential to the success of this strategy is the aggressive and 
consistent timely exit of losing trades. Conservative stops are always set and never tampered with 
unless locking-in profits. It is the ability to accept defeat immediately and without second thoughts 
that is essential (your ego doesn’t like to lose). Once a position has been entered, the next thought 
should be “cut any losses immediately and don’t look back”. 
Traders understand that losing is part of the trading reality. In other words, trading is no place for 
perfectionists because no trader will be a winner all of the time. As a matter of fact, just winning a 
majority of the time is the goal! 
How to Design and Construct An Effective Trading Plan 
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The mechanics of learning how to identify high probability trades begins with deciding you’re your 
goals are and what are the best investment vehicles to trade. Each type of investment has its own 
advantages and it depends largely on the trader’s knowledge and preferences. However, in most 
cases the more flexible the investment, the better. For example, options allow for numerous 
strategies and the ability to hedge risk; however, options require a lot more education normally not 
needed in the more traditional types of investments.
A good trading vehicle should have enough volatility and liquidity to make for active trading in a 
variety of strategies. That being said, some strategies call for little volatility but whatever trading 
vehicle you choose, you should make yourself an expert on what you choose. Not only, is it 
incumbent upon a trader to become an expert on what he or she trades but also how it trades. That is 
to say, a trader needs to become not just an expert on the technical and fundamental aspects of an 
investment but also how it acts over time. How does one go about that process of deep familiarity?