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I'm trying to model the distribution of different outcomes of day trading every day for a year. I'm starting with $350 dollars. I'm only doing options trading on Apple stock with a 5% stop loss and a 15% stop gain. And if it doesn't hit one of those stops, I sell before the market closes.

I'm not trying to find a way to control whether I win or lose on the given day, I'm just gonna do my best. But at least in the long run is there a way to use the law of large numbers so that after a year, my average is close to the probability of winning on a given day?

If I flip a coin every day for a year, I can get all heads, yeah, but it's way more likely that I get within 3 or 4 from half heads.

Is there a way to set up my option trade for the day so that it has a specific probability? Or at least on certain days that have certain conditions, will there be a pretty specific probability?

I've tried to learn "the secret to making money on the stock market", but I think for an average joe like me, I'm better off just trying to treat it as much like a coin flip as possible.

And by having certain limits on my orders, I get the impression that a probability can be calculated.

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  • Unless you can predict what prices will be in advance, the best you can do is an educated guess.
    – keshlam
    Feb 28, 2016 at 6:49
  • Can you elaborate on the mechanics of the trades you're considering? It may just be me, but I'm not clear from your description exactly what you mean by, "I'm only doing options trading on Apple stock with a 5% stop loss and a 15% stop gain. And if it doesn't hit one of those stops, I sell before the market closes." What position(s) are you entering on what type(s) of options?
    – ETD
    Feb 28, 2016 at 16:17
  • @ETD, I keep changing the trades. I think that my question is less about whether the type of trades I'm doing are going to have a specific probability. It's more about whether or not it's possible to set up a trade to have a specific probability of success, which types of trades those are, and based on that, I'll set up trades that do.
    – user26275
    Mar 4, 2016 at 16:12

2 Answers 2

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If you had a trading system, and by trading system I mean the criteria setup that you will take a trade on, then once a setup comes up at what price will you open the trade and at what price you will close the trade.

As an example, if you want to buy once price breaks through resistance at $10.00 you might place your buy order at $10.05.

So once you have a written trading system you could do backtesting on this system to get a percentage of win trades to loosing trades, your average win size to average lose size, then from this you could work out your expectancy for each trade that you follow your trading system on.

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  • You should buy at support 😝
    – NuWin
    Feb 28, 2016 at 18:45
  • There are different trading systems or strategies all with different trading, entry and exit rules. Some entry rules might be to enter after a bounce off support, in others your entry will be after breakthrough of resistance. In some cases this could be the start of a new uptrend after a long period of sideways trading.
    – Victor
    Feb 28, 2016 at 20:06
  • @Victor, So you're saying once I pick a strategy, I can look at how the strategy would have worked each day, and that will give me the probability? Kind of like how I could look at a NBA player's shots turned out under a specific shot type from a specific location to get the probability that he makes that shot?
    – user26275
    Mar 2, 2016 at 18:36
  • Something like that, it is never going to be 100% accurate but it will give you some idea. The more accurate you want the answer to be the longer the period you should backtest to cover as many market conditions as possible - bull markets, bear markets, sideway markets, more volatile markets and less volatile markets. Also, what is more important than the probability of a win is the size of your wins to the size of your losses. You are aiming for a win:loss of 3:1, which is the minimum you should aim for. You should check in your backtesting if this is being achieved or not.
    – Victor
    Mar 2, 2016 at 20:39
  • Thanks! Have you used backtick data to get probabilities before? How did you use those probabilities in practice? @Victor
    – user26275
    Mar 4, 2016 at 16:07
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No.

Like Keshlam said, unless you have a crystal ball there is no sure thing. However based on the things you said in your question, you could be better off doing some back testing. With your findings, you can then set up trades in your favor but again it's not 100%. You may also want to check out quant finance stackexhange.

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