Probabilities
Mathematical foundation used to assess risks and anticipate scenarios in trading.
Beginner-friendly explanation
Probabilities help estimate the chances that something will happen. In trading, it means knowing whether a position is more or less likely to succeed. Nothing is guaranteed, but you can make smarter decisions.
Example:
If a strategy wins 60 times out of 100, it has a 60% probability of success. It’s not a guarantee, but it’s better than a 50/50 approach.
Intermediate-level insight
Probabilities are used to build rational scenarios: you assess potential gains versus risks. This involves concepts like expected value and risk/reward ratio. Even a low win-rate strategy can be profitable if the reward is much higher than the risk.
Example:
A strategy that wins only 40% of the time but earns 3x the loss when it wins can be profitable because the expected value is positive (0.4 × 3 – 0.6 × 1 = +0.6).
Advanced perspective
Probability becomes an optimization tool: in backtesting, scenario modeling, or position sizing. Traders use result distributions, confidence intervals, or Bayesian models to make robust decisions under uncertainty. The goal is not to “be right”, but to make probabilistically sound decisions.
Example:
An algorithm dynamically adjusts its positions based on the conditional probability of a breakout, factoring in implied volatility, momentum, and distance to support — advanced probabilistic trading.
Trading Strategies
probabilities, expected value, win rate, risk/reward, uncertainty, statistics, position sizing, backtest, optimization