Ep 112 – Trading Stocks by the Numbers (Statistical Probabilities + Options)

In today’s video, we’re going to talk about trading stocks by the numbers, as we look at statistical probabilities and options.

When looking and evaluating any stock chart, you need to evaluate the chances of something happening. In the day to day world, the chances of something happening is not that difficult to really understand. However, in the stock market, things are a little bit more complicated when it comes to statistical probabilities, especially if you don’t know about how the market and prices work.

When it comes to evaluating the probabilities in the stock market, the first question you want to ask is: is the stock over extended? Either to the upside or to the downside. If it is, then it’s not in your favor to go into that extension. If it’s over extended to the downside, it is a bad idea to go short, and if it is overextended to the upside, it’s a bad idea to go long.

This happens because of the rubber band effect. If stock market prices go up a little too high, and you start to see that things are getting stretched, there is a high probability that eventually they’ll snap back down, and the stock will pull back. The same thing, if they go down a little bit too much, eventually they’ll snap back up.

Sometimes things can work out differently, if after a break to the upside or downside, you have some sideways consolidation or sideways action, this can help ease the pain, and build momentum for the stock to continue moving in the same direction, rather than snap back. But remember, the more stretched a stock is, either down or up, the bigger the snap back will be.

That’s why in general 90% of traders are wrong, because they see the sell-off happening, and they think that the stock is going down. That’s when they decide to go short, and then, all of a sudden it reverses, meaning that they were wrong, then they get out of the position and they lose a lot of money.

The second question you need to ask is: what patterns do you have in the stock chart? Is it an ABCD pattern, or a triangle pattern? The more patterns you learn to recognize, the more accurate you’ll be at predicting stock movement.

Then, ask yourself: Does volume confirm the move? Is the movement being consolidated by the volume? If you have way more volume to the downside than to the upside, more than likely the stock will continue going down, and vice versa.

And then you look at other factors, for example, the health of the market. Is the market also moving up with your stock? If your stock is moving higher, but the market is moving lower, then one less thing is in our favor. Another thing to look at is fundamental analysis, and so on and so forth.

These are some factors that you need to consider when looking at statistical probabilities, and the more factors you have in your favor, the better. And that helps increase your statistical probabilities of making the right decision.

Posted at: http://tradersfly.com/2016/12/ep-112-statistical-probabilities/

* Please note: some of the items listed below could and may be affiliate links **

* Trading Software / Tools *
Scottrade: http://bit.ly/getscott
TC2000: http://bit.ly/gettc2000
TheEconomist: http://bit.ly/starttheeconomist
TradeKing: http://bit.ly/gettradeking
TradeStation: http://bit.ly/getstation

* Recommended Trading Books *
Encyclopedia of Chart Patterns: http://amzn.to/2fCnxIB
How to Make Money in Stocks Getting Started: http://amzn.to/2f8FKsM
How to Make Money in Stocks: 4th Ed: http://amzn.to/2f8E1DQ
Reminiscences of a Stock Operator: http://amzn.to/2gpQMNm
One Up On Wall Street: http://amzn.to/2gbMHJJ



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  1. What about for small caps when you dont have options for it? How do you go about analyzing them for a swing 3 week trade? Do use fundamentals like income statements balance sheet and cashflow? Or ratios

  2. I just got started with trading (again, actually) last month, and as such, most of my time working and my earnings are going towards building a portfolio to start with. My point is, I won't have time or money for these live courses, but will recordings be available for purchase down the line?

  3. Were do I start to learn trading i been reading books and watching a lot of videos but I don't think it's enough I open a 300 dollars account just to play around and get my feet wet and bought some shares of dryships and made some profit but I think it's luck that's why I want to know how can I learn more


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