Thread by @KatariyaPran

Trading is a business of Probabilities not Certainty. So the road to Trading success is to take many high probability Trades and let the odds play out in your favor. 'Many Trades' is key here because probability is subject to the law of large numbers.

The very worst Traders are the ones who rely on certainty- the kind who look for a 80-90% success rate in the Trades they do. You can find then all over Twitter extolling the remarkable accuracy of some 'gurus' calls while singing his praises

Backtesting is the hot topic these days and relies on years of data to arrive at the Expectancy of a Trading System or Strategy while giving you a fairly good idea of the volatility of the Returns you can expect and the drawdowns you can be subjected too

But this is by no means the Holy Grail of Trading. Many renowned Traders- including the famous Richard Dennis of Turtle Traders fame- have met their end by swearing by their systems. Markets are always capable of producing events that make a mockery of any System created

My own Trading is a blend of a System and Discretion. The Option Chain provides the odds of a Trade working out as well as any backtested strategy. Problem is that while a 70% Probability will work out over large number of Trades, there's no saying what will happen over next 100

So the key is to ensure that the damage caused by an adverse sequence one has to have a methodology to keep losses down to acceptable levels during these times. To do this, I use rudimentary TA to cut losing Trades without waiting for the final outcome to play out

While this reduces the success rate below theoretical levels to an extent- cutting out otherwise good Trades which turn out to be successful after being scratched- it also greatly reduces the losses incurred on other losers that don't

So let's assume that you have reason to believe that an underlying will hold a particular level and is in an uptrend. Selling a 30 delta put has a theoretical 70% chance of success. After factoring in the Premium, maybe 75%. If IV>HV maybe 80%.

The Market does not provide any free lunches, so the Expectancy of any Trade at the start is 0. A 70% POP Trade requires you to Risk 7 to make 3. So to develop a Positive Expectancy, the Risk of 7 has to be brought down. There are a number of ways to achieve this

The first is to follow good Option Trading Practices. Ensure Volatility is relatively high and you have sufficient time in your favor. Second if you are Trading long, chose the strongest Stocks in the strongest Sectors. Use the concept of Relative Strength to the fullest

Third, most good Trades work right off the bat. Set an exit if the Trade is not working out at a level where your loss will be minimal. Very often, if you are a seller, the time decay will compensate largely for such losses or may even result in a small Profit

Most importantly follow the law of large numbers. Trade small and Trade often. Diversify your Trades over underlying, time and strategies. Have some rule of thumb to evaluate your Portfolio Risk.

And be prepared for anything. In some months the Trading Gods will smile at you and most Trades will work out without a hitch. In others, all hell will break loose and you will have a lot of work to do. But it will all work out in the end. The Laws of Probability say so.