FAQGlossaryHelp Center
Sign Up
Log In

Contents

  1. Overview
  2. Trading Small
  3. Reaching True Probability
  4. Supplemental Content

Portfolio Management: Number of Occurrences

Contents

  1. Overview
  2. Trading Small
  3. Reaching True Probability
  4. Supplemental Content

Overview

When it comes to probabilities, we have to understand that there are winners and losers. Even if we have a 99% probability of success on a trade, one percent of those trades will still be losers over a very large pool of occurrences. Let’s say that we reach our true probability over 1000 occurrences. We could expect to see 990 winners and 10 losers. The question is - where will those 10 losers occur? Nobody knows, and that’s the importance of trading small.

Trading Small

Trading small and gathering a large number of occurrences play hand in hand. To put it simply, if we trade small relative to our portfolio size (<5%), we allow ourselves to obtain a larger number of occurrences and lower our portfolio risk per trade. If we have $100,000 and we trade very small and only deploy trades that are 1% of my portfolio, we are looking at a buying power reduction of $1000. This is very small, and puts us in a good position to thrive in the long run. Positions that go against us will not destroy our portfolio when trading this small. On the other hand, if we only have $10,000 and make trades with a buying power reduction of $1000, we’re using 10% of the portfolio per trade, which becomes problematic when we incur losses. Trading small allows us to stay alive when probabilities go against us. Over time, if we trade small we allow ourselves to reach our true probabilities of the trades we route.

Reaching True Probability

With a small number of occurrences, we would consider ourselves lucky if we actually reached our true expected probability. Let’s imagine we placed a trade with an 80% probability of success, and we only allowed ourselves 10 occurrences. To reach our true probability of success, we would have to have exactly 8 winners and 2 losers every time. With this small sample size, it’s too easy to have one trade go awry and alter our results. We could have 5 losers right from the beginning, or 10 winners in a row. Either way, it doesn’t give us a strong case for reaching our true probability.

Over a much larger number of occurrences, however, we would be very surprised if our realized results were far off from our expected probability. Taking that same trade example, if we had 10,000 occurrences, we would expect to see realized success be between 75-85%. The more occurrences we have, the closer we would expect this number to be to 80%.

We need to remember that we are trading in a random environment, and even though we have expected probabilities, it’s going to take some time to realize those results. Trading small, and eventually obtaining a large number of occurrences are two ways we can combat the random acts of the market, and ensure we maintain a proper amount of capital in our account.

Supplemental Content

Episodes on Number of Occurrences

No episodes available at this time. Check back later!

tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.