Probability is very relevant to trading, and one of the main things I look for when entering trades for example, is to have a high probability of having a profitable trade. In other words, because all of my conditions have been met, I enter the trade with confidence knowing there is a fair chance of the trade resulting in a profit. As we know, there are never any certainties.

Probability has its place in money management too, specifically position sizing.

Let’s set the scene. Perhaps we have a trading method that results in half of our trades being profits and the other half being losses or close to breakeven. We start with $10000 and after a few losses, our trading capital has lessened to $9400. (3 x $200 losses in successive trades).

Now, we begin to think that we are behind and need to make up the deficit so we can move forward and begin to make money. As each losing trade passes however, the money we need to make to get back to breakeven (back to the initial $10000) increases and we have less and less capital to do it with, which places pressure on us to perform.

The trap we can fall into is to increase our trade size on the back of successive losses. In the back of our mind are desperation, and the thought that we need to have a massive winner trade soon to get back on track.

Here is where probability enters the scene. As each losing trade passes, we can easily think that the chance of the next trade being a profit increases significantly. It is too easy to think this and with this in the back of our mind, we can be tempted to increase our trade size to get back to break even quickly because the chance of the next trade being another loss is not great.

Let’s explain this scenario with some numbers. The probability of an event is generally represented as a real number between 0 and 1, inclusive. An impossible event has a probability of exactly 0, and a certain event has a probability of 1.

As we have a proven method that is profitable in half of the trades, the probability of having a profitable trade is 0.5. The most common analogy used with a probability of 0.5 is that of tossing a coin. When we toss a coin, the probability that it will land heads up on any given coin toss is 0.5 or 50%, and the same of landing tails. So if we toss the coin 10 times, we would expect that the result will be 5 heads and 5 tails. There is however, no guarantee that this will occur. It is possible for example, to result in 10 heads in a row. The key here however, is that each coin toss is independent. In other words, the outcome of the next toss is unaffected by previous coin tosses, as the coin has no memory retention.

Let's assume I am now tossing a coin. We toss the coin once and it result in heads. For the second coin toss, the probability that heads will come up again remains at 0.5. The second toss now results in another head – that’s two heads in a row. For the third toss, the probability that heads will come up again still remains at 0.5. Guess what? The third toss was also a head – that’s three in a row. Do you know what the probability of the fourth coin toss being a head is? It remains the same probability as a tail coming up.

This scenario is applicable in trading.

If you have had 3 losses in a row, the probability that you are going to have a profitable trade doesn’t automatically shift in your favour. Nor does it continue to shift as each losing trading passes. We like to think it does, but it doesn’t. Perhaps we think, “The next trade HAS to be a winner!” Like the coin, the market has no memory retention and doesn’t keep track of your previous trades, in order to influence the outcome of future trades.

The key message here is that don’t increase your trade size according to these unfounded thoughts. This is a sure recipe for disaster. After a few losses, your trade size should be decreased slightly to reflect your diminished trading capital, even though you don't want to.

Stuart McPhee is recognized as a leading trading coach and expert when it comes to developing solid and profitable trading plans.

In trading the stock market, no-one has a crystal ball. The price of stocks can go down, as well as up. What is needed is an exit strategy that will enable you to survive the bad stocks, and make a good profit on the good stocks. The method that I have found to work the best is a trailing stop loss. For those who don’t know what a stop loss is, I shall explain briefly. A stop loss is an order for your stock broker to sell your shares if the price dips to the level that you have specified.

There are two ways of doing this. The simplest method is to decide on how much you are willing to lose as a percentage of your investment. A good rule is not to go less than 10%. Work out the price of the stock at this level and set that as your stop loss. As the price of the stock increases, keep moving the level of the stop up to keep the percentage gap the same. Some brokers offer a trailing stop loss service, where you tell them what percentage to set the loss at and they do it for you.

The second method is slightly more complicated, and comes from “Nicolas Darvas” in his book “How I made $2,000,000 in the Stock Market”. The markets tend to flow in stages. a stock on the rise will reach a peak, and then dip back down. It may do this several times at each stage. The idea is to follow the chart of the stock and see where the dips are the lowest, and set the stop loss just below them. A second part which Nicolas propounds is that when the stock breaks out of the sideways trend, to buy more of the stock, and when the stock starts going sideways again to move the stop loss up again to just below the lowest part of the dip.

Using the stop loss as an exit strategy, only works if you stick to it, and not lower it, thinking that the price will go up again in a few days. In a few cases you will be right, but what usually happens is the price keeps moving against you, and you loose even more money. As a secondary to this, the money still tied up in the first stock that is falling can’t be used on another trade.

Finally, a word of warning about using the stop loss system to protect your capital. There are times when the markets undergoes a fast fall in price, there are regulations about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you may be unable to sell. Although these situations are rare, it is better that you know about them. So that they are not a shock when they do happen to you.

With the boom in numbers of people accessing the internet everyday, is it any surprise that they'd be looking to be able to trade stocks and invest online?

Nope, not really!

Because of this demand, the number of and quality of internet based trading companies has grown, providing stock trading solutions with more efficient, secure, and manageable applications.

Now this is the reason for the popularity of online stock investing; anybody can open an account with a stocks or funds trading company and easily and quickly arrange for a trade commission based on the volume and amount of trades.

Once all of the online paperwork is finished (it isn't a huge amount really) and you feel comfortable with how the online trading system works then, well, off you go trading.

Now, even if you're an old hand and a veteran - and especially if you aren't! - reading the online technical and fundamental research analysis really is a must. T.he online companies have teams of qualified and experienced research analysts who check reports, follow the latest news, trends and forecasts and who are experienced enough to give advice - direct to you over your computer

The differences between traditional investing - when you'd call up your tame stockbroker, discuss the info he had on the company or companies of interest and then buy,buy,buy and ordering the stocks, buying and selling them purely online - is something you should make yourself familiar with in a hurry.

The more traditional investing method gave you a personal contact inside the game, almost like a comforter. How can you get that same feeling from sitting in front of your computer in your kitchen or study though?

Investing online isn’t completely without the traditional personal contact that the investor was familiar with though.

Personal advice is always possible through private message boards and the like. This personal contact can recommend companies and stocks in which the investor should consider.

But be warned - never buy solely on a "hot tip" you heard from 'good old Tim' in the forum!

Never!

Listen to the tip and make note of the details, certainly. But do your OWN RESEARCH before shelling out thousands of dollars only to find them plummet and vanish from trace. (That's when you find out that gold old Tim is 13 years old and his mum and dad have been meaning to put restrictions on the internet access on his computer for ages!!)

You've been warned!

Now you must choose what companies or stocks to invest in instead of getting full decisions made by companies or brokers.

Reading articles created by the internet investment companies can give the investor information about the field and products available. Don’t simply read anything you can get your hands on about investments on the internet, read what is published by the established companies that you are paying to make your dollar. Find credibility, and then find information.

The first time online investor should plan well for their first excursion into investing on the internet.

Gain as much knowledge as possible on how the online trading system works and just how small or large you plan to start.

Starting with a small investment to understand the way the system works is smart for any first time investor, don’t lose everything before finding out if it is right for you or not.

Don’t put all your investment eggs in one basket, your savings are there from hard work and dedication, don’t blow it on hope and a pipe dream of being as rich as Bill Gates.

Do it right and you'll find that you can invest well and quickly. After all, the internet never goes home at the end of the day, stops for a coffee break or takes two weeks holiday, does it!

In numerous traders clubs and forums, you will often find people who routinely disclose what positions they have and why. Often, the intentions of these people are innocent in that they want to help others to discover an approach that is going to work for them. They want to teach the recipients and empower them to learn more about trading. Sometimes, the person disclosing the information may have other intentions however there is always the chance that this could have a detrimental effect on the person disclosing the information.

They need to be careful that they don’t start believing too much in their position just because they have disclosed it to others.

At the best of times, taking losses can be difficult. It is probably the most single identifiable reason why traders fail. Taking a loss means that you must accept that you got the trade wrong and this can be difficult for a lot of people. Now that you have disclosed your trade to a group of people, it can make it even harder to accept that you were wrong and therefore close the trade when you should. Advocating the trade to others instills in you the positives of the trade and these may eventually subconsciously influence your decision to not exit the trade.

Traders should avoid discussing their open positions and their opinion on various potential trades because it may affect their objectivity when in that position themselves and make it harder to take a loss, even when that is their best course of action.

Confident traders rely on their own methodology and not what others are saying.

If you make a habit of discussing your open trades, there is a chance it will end up costing you money, especially if you repeat your opinions often enough, in that you might actually start believing what you are saying.

The same goes with tips. A common rule is to not give nor listen to tips. A trap that you can easily fall into with a tip, can occur when your position starts to move against you. You are more inclined to break the rules and not cut your loss because of the ‘reliable’ information you have heard about the security’s future. Have confidence in your own approach and never worry about tips of any nature regardless of whom they are from.

When you give a tip, and the position moves against you, it is possible to feel some obligation to stay in the trade because of the relationship you have with the person you gave the tip to. It is unlikely that you could face up to the person one week after the position was entered, and tell them that the tip is no good and they should exit.

In his book ‘Reminiscences of a Stock Operator’ (a fictionalised biography of one of the greatest market speculators, Jesse Livermore), Edwin Lefevre mentions how destructive tips can be to one’s trading. This is coming from a book that was first published in 1923 and is one of the most highly regarded financial books ever written. Back in 1923, tips were considered disastrous, so there is no reason to think that they are different today.

Trust yourself and have confidence in your own methodology.

Stuart McPhee is recognized as a leading trading coach and expert when it comes to developing solid and profitable trading plans.

Predicting the stock market has always been a fascinating science. It can be done in different shapes and forms. Here are a few:

1. Stock Market Prediction based on Gurus

We see a lot of them on TV. Many seasoned traders and brokers appear on financial TV channels, and by using either fundamental analysis, technical analysis, or both, predict the move of a certain stock, whether for the next week, month or even for a longer term period. Even though these predictions can be used for long time investors, short term traders normally use personalized tools to predict the next movement in a particular security.

2. Stock Market Prediction based on Fundamental Analysis

Fundamental analysts scrutinise the company pertaining to the stock which they are going to trade. They get all the possible data figures for that company, they enquire on the directors and main shareholders, learn on the products or services they produce, keep a constant eye on news, not only financial, but information pertaining to their line of business, and more. Based on this information, analysts predict the stock movement for the next few days, weeks or months.

3. Stock Market Prediction based on Technical Analysis

Technical analysts look at charts, they draw trends on the chart by joining low points with high points, they insert formulas which produce various calculations based on past highs, lows and volumes. Lines can be drawn determining support and resistance levels. These are the basis of predicting a stock price based on technical analysis. Many times information like company dividends, news and directors are of no value to technical traders.

4. Stock Market Prediction based on Software Training

Predicting the stock market with state-of-the-art software is a possibility today with all the advances in technology. Some stock market software packages have the possibility to import data for the past weeks, months or years of a security, and based on specific formulas and equations, using complex algorithms, can train themselves on this data and on the movement of the stock price. The result of this is the prediction of the future price of the stock. Normally these packages work on technical information, but some are now also introducing fundamental analysis as part of this training and prediction process.

5. Stock Market Prediction based on Momentum

Many day traders use what is called ‘Level 2’ data to base their trades. While the stock market is open, the trader can see a list of buying orders on one side and a list of selling orders on the other side. Price and volume are shown, together with other information, from which seasoned traders gauge the momentum of the stock and take short term trades, normally lasting only a few seconds or minutes, to profit from a sudden change of price.

Successfully predicting the stock market, or even, one security, is a must for every trader. Success or failure depends on this. One needs to gain as much knowledge as possible on all possibilities available, and when one is comfortable with a pre-tested and working system, that system can be used as the basis on which to invest or trade in the stock market.

The stock market offers various opportunities for trading. Apart from the main securities, which one can trade on various exchanges like the New York Stock Exchange and Nasdaq, there are other forms of trading like forex trading, currency trading and ‘contracts for difference’ also known as CFDs.

Stock market trading normally involves opening a trade by going ‘Long’ (buying) or going ‘Short’ (selling). The later has been possible through the last few years. One can today ‘sell’ a stock with the aspiration that the stock goes down and buy it cheaper at a later time, thus making profit as a result of the diminishing of the stock value.

Greed and Fear Stock market trading can be very profitable but if not mastered correctly can lead to heavy losses and the loss of ones own capital. Various psychological factors can affect the way one trades. The most predominant ones are ‘greed’ and ‘fear’. Greed kicks in when your system directs you to exit a trade but rather than exiting, one remains in the trade with the hope of closing the trade at a better price. On the other hand, fear is also a very dangerous factor which can lead to exiting trades when the time is not right, or exiting trades too early.

The best way to keep these feelings away is only one – follow your system vigorously. In order to fully trust a system, it would first need to go through a lot of testing in order to seed in one’s mind the thought that the system works and is completely reliable. It is only when one is convinced of this that when the feelings of ‘greed’ and ‘fear’ rise, they are controlled and ignored.

CFD Trading
One very interesting way of trading is CFDs (contracts for difference). Rather than buying and selling the actual shares, one would enter into a contract with a broker to buy or sell a particular share at an agreed price. The price would still be the market price at the current time, and the speed of transactions is similar to the speed of actually trading the shares, i.e. a few seconds. One of the advantages of CFDs is ‘trading on margin’. Some brokers offer very competitive margins where, for example, with a capital of $20,000, one could trade shares for a total of $100,000. This can be very dangerous and is only advised to the professional market players.

Technical Analysis
Hundreds of technical tools exist for traders. Various software systems can display a stock’s chart in real time, enabling you to draw trending and trading lines, include calculations like moving averages and ratios, and some can even predict the price based on a combination of factors and previous training and testing cycles.

Charts
Charts are a must for most stock traders. A chart tells the story much more than words do. By looking at a chart, a professional trader can diagnose the condition of a particular stock, just like a doctor does with his patient. Adding some analysis tools to a chart can further help in understanding what is going on with a particular stock.

On charts one can determine whether a stock is overbought or oversold, whether a stock is reaching a support or resistance level, is heavily in demand and short of supply or vice versa. As a result of these factors and many others which one can include in a system, a decision to buy, sell or exit trades can be taken.

Stock market trading is a high return job for those who are serious about it. Various methods exist and some degree of research is required before one can start trading for a living.