Thinking in probabilities

It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance

Jesse Livermore

Of all the quotes both in Reminiscences of a Stock Operator and his own How to Trade Stocks, this quote is one of my favourites.

It kept me going throughout all those dark years of being a losing trader.

I grasped what he meant, but it was 8 years before I could shed my ignorance.

I haven’t made my millions trading yet, but I can attest to the fact trading is no longer difficult.

I read here on Babypips, what is the secret to trading? Or what is the one thing that improved your trading?

For me, it’s something I took from a Mark Douglas book, not sure which one though.

And it is to think in probabilities.

It’s that simple, especially if you’re a system trader.

Thinking in probabilities sums up the essence of trading.

I no longer care (so much) if a trade wins or not.

I don’t like losing money as much as the next man, but like the number ten bus, there’s another winning trade on its way soon.

I’ve done my backtesting, I know my system works. I have done the psychological work too.

All the hard work is complete.

It seems a lot on this forum seem to care which way the market’s headed. They’re either a bull or bear.

I am neither. It keeps my mind clear.

It’s a lot of hard work figuring out where the market is headed. I know I have tried. Sometimes I am even right. But these days I just let the market lead me and I follow.

Every time I respond to a thread about market direction I soon regret it.

I am humble enough now to realise I have no clue. New traders take note, you don’t have to know where the market is going to make money.

I simply react to the probabilities.

I think the reason why so many fail in trading is that as humans we crave certainty. We add more lines to our charts, go in trading chatrooms hoping others will confirm our opinion.

Seek out analysts who supposedly know more than we do.

All to add to our certainty.

But there is no certainty in trading. Just probabilities. As soon as you figure that out, the sooner you will be profitable.

My advice (if anyone wants to hear it) is to embrace the uncertainty and stop trying to find the infallible system or guru that eases your fear of losing.


Beautifully put. Opinion is the enemy of successful trading: as soon as a trader forms an opinion, his conception of probabilities goes out the window - he’s right, obviously he’s right, if he wasn’t right he wouldn’t have formed the opinion that he has…

Sadly the depth of analysis many traders reach is simply, “Price is up, I must get short…”


I fully agree with what you say, but, personally (as always!) I would add to probabilities the need for clear risk/money management parameters. Probabilities will help get the direction but if one’s risk exposure is not controlled then it may still be in vain?


Well as Jesse Livermore used to say speculation has three legs - market timing, money management and psychology.

Thinking in probabilities takes care of the pyschology aspect only but for many, Livermore included it was the hardest part.

1 Like

When you say “thinking in probabilities” what exactly do you mean as that is a very broard statement.




What I mean by that is accepting the fact that anything can happen once in a trade.

A common thing is to pay lip service to good money management by placing a protective stop - and then get all butt hurt when it’s hit and the trade loses.

That is not accepting there’s a chance you lose on all but the surface level

A probability mindset simply shrugs and says ‘next’

Thank you for that.

I view probability in a different manner. I think probability is the most over looked factor in trading. But when I view a trade though the prism of probability I ask myself “what is the probability that this trade will work in my favour??” 50% 60% 70%??

There is no doubt that the market can go in any direction and a trader needs to be fluid in their thinking to adapte to changing markets. But once you have a bias of market direction, and lets face it you would not pull the trigger on a trade without some level of market direction bias, then the question of probability comes into play. What is the probability that this trade will be successful??

Losing in trading is just the cost of doing business. However you still need to be concerned about those loses and evaluate as to whether it was just a failed trade or whether it was you who did something wrong when you took the trade.





I think we agree but just saying it differently. If you have done your backtesting, have a good idea of the metrics of a system then - ok I’m not literally assessing the probability each trade - but I have a map of how it’s likely to work over the course of so many trades.

That means I can sort of relax knowing the system takes care of itself.


I think one of the biggest hurdles for a beginner is actually having trust in the approach they are using.

That can cause all sorts of problems - even if the system is net profitable

I know through experience what I do works - so it gives me the luxury of not worrying after a loss.

In fact I think for beginners the whole area of technical analysis is puzzling. How can a few squiggly lines on charts make you money - then comes the mistrust.


I think sometimes you set the probabities yourself, through you mindset. You can have a successful system but still lose because you believe you will.
I have been trading for about a year and a half now. I have lost alot which is to be expected but as time goes on my strategy has been getting more and more refined which is what counts. So over the last few weeks I have had some success.
At the beginning of this week I began to get paranoid. I told myself that I have simply had a winning streak and that the probability is that it will come to an end. So it did.
Now I cannot help but think it was the way I began to think this week that caused the probabilities to shift against me. The minute I began thinking that the probability of losses is increasing because of the number of wins I have had I lost my ability to think unemotionally and objectively. I started watching the news alot more frequently to catch the slightest indication of changing market conditions and I began to overthink each trade.
So I think probability can sometimes be determined by your own state of mind


First off everything I say is about mechanical systems. The moment we start using discretion we open a whole new can on worms.

What you are saying I think is your negative expectations are causing you to tweak, change or alter your strategy when in a trade?

Clearly if you mean your negative expectations are altering the outcome without you messing with your system - well that is in the realm of quantum physics something I’m not qualified to discuss.

Sometimes it sure feels like the markets are doing the opposite of what we want just to annoy us but I think that’s an illusion.

I think, despite you thinking you are thinking in probabilities you are clearly not.

Let’s say your system has a win rate of 65%. And you’ve just had ten wins in a row, well your system still has a win rate of 65% regardless of the streak.

Previous results do not affect the probability of the next result - something many of us forget

I’m too am as guilty of this when I have a string of loses recency bias starts me thinking I’ll have more.

This can lead to all sorts of tinkering with systems and takes us away from consistency.

When Im talking about thinking in probabilities what I mean is the acceptance that pretty much anything can happen on any one trade - but over a series of them the odds will work out in your favour.

This is discussed in Mark Douglas ‘Trading in the zone’ he talks about trading with a casino like edge.

That is the mentality we need - after a loser, or even winner it’s just ‘next’.

You talk about the news and how it affects your thinking

A big step for me in my trading was when I realised experts are clueless - my system knows best

Then I realised that despite my own opinions - my system knows best.

There are many times I think the market will do one thing, but my system tells me to do the opposite.

You have to get used to ignoring your own opinions - and just follow the system.

This isn’t a problem for me now because I’ve had so many experiences where I was wrong and the system right - but I admit it’s harder when new to trading.


Hmmm that is a far more in depth discussion. You are correct in that I took a more general approach to the topic. I will try to consider this a little more deeply.
I have a system that I am becoming more and more confident in because it has increased my hit rate but it is too soon to tell so I suppose I am not really qualified to comment on that just yet.
What I will do however is watch the videos and the link and see if I can understand

1 Like

OK I am struggling with the links the videos are no longer available.


I’m not quite sure what videos you are referring to, but if your confident with your system go for it - but do it with small amounts of money first.

The markets are always going to be there.

It took me 8 yrs before I became consistently profitable, so believe me there is no rush.

We have all been through the same thing in fact I would honestly say I was worst than most.

There are some great traders on here @anon46773462, @tommor, @Blackduck, @Lang15 to name but a few.


It all comes down to placing trades when the odds of winning are greater than those of losing, in other words, tipping the balance in your favor.

1 Like

Yeah that’s not a bad way of looking at it.




It remains only to find this optimal balance, and feel it in order to make good money.

I think you’re very fortunate if you can survive eight years of losses and still be able to put food on the table and keep a roof over your head. You must have had a ‘day job’ that not only fed you (and your family, if you even have one) but made up for all the money you lost in your unsuccessful trading. I only wish that everyone could be so lucky.


Very fortunate and very stupid.

Fortunate to have had a windfall before trading and for landing into a good job whilst living in a cheaper country (geographical arbitrage lol)

But trading never came easy it was definetly the school of hard knocks approach for me.

In your beginning days did you back test everyday? And once you knew what worked did you back test once a week or so?