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Showing results for tags 'probability'.
Found 4 results
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Could you suggest any understandable read on this topic? My advanced mathematical grasp is very limited, hoping for something comprehensible. Any author who took the pain to explain it step-by-step from basics to advanced. Thank you!
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Hello everyone, I have seen a lot of places state how certain candle stick formations such as a Marubozu or a hammer have a probability of being a reversal and even sites like thepatternsite.com has probabilities of each type of candle and its likelihood of a reversal or a big move, but I can not find any information on the internet about how to work out these probabilities myself. I was thinking of doing it in matlab but I was wondering if that was the best way to do it, is there any other ways that would be better or faster? If someone out there has all the data that I could see, that would be really interesting. I look forward to hearing your replies, Best regards, Vig
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I want to share a technique that can help you to choose your desired winning frequency before you enter into a trade. I would guess a larger number of retail traders don't lose because they are wrong but because they use stops improperly and lose money even when they're right. Assume for these purposes that the market is mostly random, if true then that means that an X point move up or down has little value in determining what the market will do next because, of course, if it did have value then we could use that predict it. Now, it is true that I predict the market but I will agree that the market is mostly random to most people most of the time. This implies we can determine our win frequency before entering a trade simply by choosing a stop and target of the appropriate size. The expected profit must be zero. The formula is: WIN AMOUNT * WIN FREQUENCY – LOSS AMOUNT * LOSS FREQUENCY = 0 Examples: +5 and -5 point target and stop will win 50% by random chance +5 and -15 point target and stop will win 75% by random chance +5 and -20 point target and stop will win 80% by random chance Formula examples: 5*W-5*(1-W) = 0 5W – 5 + 5W = 0 10W = 5, W = ½, W = .5 5*W-20(1-W) =0 5W -20 + 20W =0 25W = 20 W = 20/25 = .8 If these are challenging, you can use the equation solver at http://www.algebrahelp.com/calculators/equation/ You can choose any winning ratio that you desire using this method. I personally would feel quite comfortable with 65% to 80% win ratio. Of course, your profit expectation is still going to be zero unless you have an edge. My point is that many people may have a slight 2% to 5% edge but ruin it with poor stops. It is very easy to erode such a small edge with a poor stop. The goal is to use the mathematics of randomness to prevent that. While the expectation is the true measure of a system, if one chooses a system with a very low win rate then by random chance they could experience a very long streak of losers. Psychologically this will be difficult for many to work through. I have, also found that when win rates drop below around 55% that the resultant equity curves become rather unstable. It is worth to consider the assumptions in which choosing a higher win rate would work better then not. If our model is such that we can predict that the market will move in a given direction more times then not then choosing a higher win rate should be beneficial. However, if our ability is more about predicting the larger movements then we may want to choose a lower risk and a higher reward payoff. This is an updated authorized partial excerpt from My Favorite Edges Bonus. Chapter "Choose Your Win Rate". ---- Curtis
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This might be a dumb question but I'm compelled to ask anyway. Does anyone here know how I would go about calculating the probability (percentage wise) of price reaching a certain point completely disregarding past behavior? For example, say we ignore setups, patterns etc, and just randomly place a trade at any given time... so you buy at a stock at $10, you set a target at 15$, and a stop at $5. This would be an equal distribution so I would assume you have a 50/50 chance of your stop/target being hit, basically equal odds right? So how would I calculate the probablity of entering at $10, target $20, and place a stop at $5... the distribution is no longer equal so things change quite a bit. I'm not very good at math so I could use some help... for some of you this is a cake walk I'm sure. Any input is greatly appreciated, thanks.
