Good Day Rookie Bloggers! Last week we reviewed our mock position which was a covered call on ABM. We extolled the wonders of owning stock versus going after cash flow without ownership. If you don’t quite remember the rundown then I will recap here so that we can all be up to speed when we move onto the next part of our iron condor trade. We originally put on a naked put trade on ENB which despite us putting the odds in our favor to cash the trade it didn’t work out our way. That brings me to a very important point that each new student I meet reminds of a lesson that takes some time to really grasp and that lesson is the law of large numbers. Some will call this sample size or a series of events or in this case number of trades. You see trading results come down to distribution and standard deviations.

If you remember your high school level statistics course you might remember the bell shape curve. For those who are not familiar with this concept, I have put a visual below for your reference. This distribution explains the law of probabilities. Let me try to explain this concept simply by saying the if flipped a coin 10 times it is possible that you could get all heads or all tails even though it seems very unlikely that it would play out that way. However, if you flipped a coin 10000 times then you would get a distribution that is closer to the 50/50 odds that flipping a coin represents. This is the law of large numbers and it works in trading as well.

If we do a trade with an 80% probability of success and we do that same trade 10 times then it is possible that we could have 10 losing trades in a row but if we so that same trade 10000 times in a row then the distribution will come closer to that 80% winning mark. The bell-shaped curve below here represents that very idea. This is the idea of standard deviation. Most of the time the markets move approximately 1 standard deviation as represented by the 34.1% part of the curve. In other times the market may move 2 standard deviations but less frequently as seen by the 13.6% part of the curve and of 3 standard deviations and beyond is even less likely.

Now, these results only come out in the wash after many samples and you will find that over the short term anything can happen but in the long run, this is usually how things work out if consistency is maintained. I mentioned earlier about this concept by almost of the new students I meet and that is because they only look at the microcosm of a few trades and believe that will be the long term results and that is just not the case. My mentor once told me the odds and probabilities will take over every time if one is patient enough to see it through. So back to our naked put trade that went against us, even though we had almost an 80% chance of winning and we still lost doesn’t mean that doing high probability trades don’t work, what it means is that we just have to do it some more and let the math take over!!!

So in this weeks video,we will go over the two mock trades we have as there is much to be learned from these trades. Also, we will put on the other type of credit spread which is known as the Bear Call spread. We are putting these trades on individually but when we do them together they become the Iron Condor strategy and this is one that works very well in consolidating markets. So check out the video for any nuggets of wisdom we can find and then we will wrap up the consolidation phase next week and start working on breaking out to the trend which is everyone’s favorite phase of the market!

Until next time….Be Awesome!!!!