The Hidden Key To My 86% Win Rate

(no crystal ball required)                                                                                                                                                                                                                                                                                                                                                                                                                 August 20, 2024 | [Read Online]( [fb]( [fb]( [fb]( [fb](mailto:?subject=Post%20from%20Don%27s%20Trading%20Desk&body=The%20Hidden%20Key%20To%20My%2086%25%20Win%20Rate%3A%20%28no%20crystal%20ball%20required%29%0A%0Ahttps%3A%2F%2Fdon-kaufman.beehiiv.com%2Fp%2Fhidden-key-86-win-rate) Don Kaufman here. I’ve rattled 19 wins out of the last 22 trades utilizing my [In/Out Strategy]( in this rollercoaster market. It has nothing to do with my ability to read the market (although it helps)... Nor is it about having some mystical crystal ball to predict stock movements. The secret sauce? It’s all about something most option trading novices ignore… But is absolutely crucial for your success in trading: Understanding Probabilities. Now, I know what you're thinking – "Don, I'm here to make money, not solve math problems!" But trust me, understanding probabilities in options trading is like having a secret weapon in your arsenal. It's what separates the pros from the amateurs, and it's going to transform the way you approach your trades. Let's start with the basics. What exactly do we mean by probabilities in options trading? Simply put, it's the likelihood of certain outcomes occurring in your trades. But here's the kicker – we're not just talking about whether a stock will go up or down. Oh no, we're getting much more specific than that. The first probability concept you need to wrap your head around is the Probability of Expiring. This bad boy tells you the chances of an option expiring in-the-money or out-of-the-money at expiration. It's based on factors like current stock price, strike price, time to expiration, and volatility. Now, here's a mind-blowing fact for you: when you buy an at-the-money option, your probability of making even one penny is statistically 50% or less. Let that sink in for a moment. But wait, there's more… Let's talk about the Probability of Touching. This is where things get really interesting. The Probability of Touching tells you the likelihood of a stock price reaching a certain level at any point before expiration. And let me tell you, this concept is an absolute game-changer, especially when it comes to setting stop-losses. Picture this: you buy a stock at $60, set a stop-loss at $59, and a target price of $62. You might think you've got a solid plan, right? Well, hold onto your hats, because the Probability of Touching is about to blow your mind. In many cases, you're more likely to get stopped out than to hit your target price. Why? Because the stock price can dance around like a caffeinated squirrel, touching your stop-loss even if it ends up at your target price later. Now, you might be wondering, "Don, this all sounds great, but how does it actually help me make money?" Great question! Understanding these probabilities impacts your trading decisions in several crucial ways. First off, it helps you set realistic expectations. If you know the odds are stacked against you when buying single options, you might think twice about YOLOing your account on out-of-the-money calls. Instead, you'll start looking for strategies that give you a statistical edge. Secondly, it improves your risk management. When you understand the Probability of Touching, you'll realize that tight stop-losses might be doing more harm than good. You'll start focusing on position sizing and defined-risk strategies instead of relying on arbitrary stop levels. Not only that, it pushes you towards more consistent trading. Instead of swinging for the fences on every trade, you'll start thinking in terms of long-term probabilities. It's not about being right on every trade… It's about having a strategy that wins more often than it loses over hundreds or thousands of trades. So, how does all this tie into our In/Out Spreads strategy? Well, let me tell you, it's a match made in trading heaven. [In/Out Spreads are all about leveraging probabilities in your favor.Â]( By buying an in-the-money option and selling an out-of-the-money option, we're creating a position with a higher Probability of Touching our profit target than our max loss. Here's the secret sauce: when we construct our In/Out Spreads properly, we're aiming for a risk-reward ratio of about 1:1. Now, you might be thinking, "Don, that doesn't sound very exciting." But here's where the magic happens. If we can be right on our directional bias just slightly more than 50% of the time, we start generating consistent profits. And let's face it, with a little chart reading and some common sense, being right 51% of the time isn't exactly rocket science. But here's the thing… because we're using spreads instead of single options, we're not getting crushed by time decay or volatility changes. We've essentially eliminated two of the biggest headaches in options trading, allowing us to stay in trades longer and let our directional bias play out. Now, I'm not saying probabilities are a crystal ball. The markets can always throw us curveballs. But understanding and applying these concepts gives us a massive edge. It's like counting cards in blackjack – the house might still win sometimes, but over the long run, the odds are in our favor. So, here's your homework: Start looking at your options chain not just in terms of prices, but in terms of probabilities. Look at the Delta of options as an approximation of their Probability of Expiring in-the-money. Start thinking about your trades not in terms of individual winners and losers, but as part of a larger probabilistic system. Remember, successful trading isn't about predicting the future. It's about putting the odds in your favor and managing risk effectively. Master these probability concepts, [apply them to your In/Out Spreads](, and watch your trading transform from a guessing game to a strategic, probability-based approach. That's all for now… Keep those probabilities in mind, and until next time, trade well! To your success, Don Kaufman P.S. Remember, our 86% win rate with the In/Out strategy isn't just luck – it's probability in action. By understanding and applying these concepts, you too can tip the odds in your favor. [Click here to learn more about the In/Out Strategy]( [fb]( [tw]( [ig]( [yt]( Update your email preferences or unsubscribe [here]( © 2024 Don Kaufman - TheoTrade PO Box 24790 Christiansted, Virgin Islands 00824, Virgin Islands, U.S. [Terms of Service](