February 4, 2016

Probability of profit (options)

If you flip a coin, there's a 50/50 chance of head or tails, right?

But if you flip it five times, it could potentially land on tails five times. This does't mean that the coin is rigged or that the probabilities have changed, it just means there hasn't been a high enough number of occurrences for the probabilities to play out.

If you were to continue flipping it a few hundred times, the probabilities would move closer and closer to 50/50 as you continue flipping.

At the end of the day, probabilities are probabilities.  If we risk our entire account on one trade that has a P.O.P (probability of profit) of 80%, we may win; however, the statistics tell us that we will lose approximately 20% of those trades over time. If one of those times happens to be now, we would be wiped out with no cash left to put on more trades!

Read more at https://www.dough.com/blog/probability-of-profit

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