Probability in Trading

[pbylina 10]

If I where playing a game where someone flips a coin and I have to guess which side it lands on, what are my odds of me being right? 50% right?

 

If I use the coin flip to make a trade(heads go long, tails go short) it is still 50% chance of being right. But I believe this is true if the TP and SL are equal distance from the entry.(TP=2 and SL=2)

 

The question is, If I now increase stop to 3 and keep TP and 2, is there a higher probability of it hitting my TP since it is closer?

 

Thanks.

[TheDude 10]

no - because market prices are not random. they just seem like they are.

 

it would be an interesting experiment to back test your idea under 3 scenarios:

 

1. 2 tick TP 3 tick SL

2. 20 tick TP 30 tick SL

3. 200 tick TP 300 tick SL

 

My guess is that scenario 1 will have a significantly different outcome to scenario 3. Just my gut feel.

 

BTW, dont forget to include bro in your calculations. They are the hidden killer.

[Tams 20]

If I where playing a game where someone flips a coin and I have to guess which side it lands on, what are my odds of me being right? 50% right?

 

If I use the coin flip to make a trade(heads go long, tails go short) it is still 50% chance of being right. But I believe this is true if the TP and SL are equal distance from the entry.(TP=2 and SL=2)

 

The question is, If I now increase stop to 3 and keep TP and 2, is there a higher probability of it hitting my TP since it is closer?

 

Thanks.

 

If the market participants use random methods to decide buy/sell decisions,

 

you will observe your coin-toss trials return a 50-50 performance.

[MightyMouse 12]

no - because market prices are not random. they just seem like they are.

 

it would be an interesting experiment to back test your idea under 3 scenarios:

 

1. 2 tick TP 3 tick SL

2. 20 tick TP 30 tick SL

3. 200 tick TP 300 tick SL

 

My guess is that scenario 1 will have a significantly different outcome to scenario 3. Just my gut feel.

 

BTW, dont forget to include bro in your calculations. They are the hidden killer.

 

The percent winners have to be higher than 50% for either of the 3 scenarios to be profitable. Keep in mind that in order to make 2 ticks, price has to move 3 ticks to guarantee an exit.To lose 3 ticks, it only has to go 3 ticks to guarantee a loss. At the end of the week,month, or year add up your commissions and you'll know who your partner is.

[TheDude 10]

The percent winners have to be higher than 50% for either of the 3 scenarios to be profitable. Keep in mind that in order to make 2 ticks, price has to move 3 ticks to guarantee an exit.To lose 3 ticks, it only has to go 3 ticks to guarantee a loss. At the end of the week,month, or year add up your commissions and you'll know who your partner is.

 

I agree.

 

Its worth considering that with skills in reading the order book, placing exits before entry to get a better place in the queue etc (more relevant in a 2-3 scenario than the 200-300 scenario), there will be times in real life when you will get the 2 tick target without that level getting taken out and the 3rd printing.

 

For the purposes of real-life testing and viability I'd go with your wisdom.

 

For the purpose of exploring price distribution though and the 3 scenarios for a bit of holiday fun if anyone has the time or inclination, maybe it could be educational?....

 

I tried to attach a few hours of T&S data from my X Trader but the file is 3.34 MB - too much for the websites limit

 

If anyone can tell me how to do such a test in excel, (other than RTFM) and I'll see if I can come up with something useful - 1 days T&S is probably only useful for the first test, but I can down load 30min and daily data for the 2nd & 3rd.

Edited December 30, 2011 by TheDude

[pbylina 10]

I agree.

 

Its worth considering that with skills in reading the order book, placing exits before entry to get a better place in the queue etc (more relevant in a 2-3 scenario than the 200-300 scenario), there will be times in real life when you will get the 2 tick target without that level getting taken out and the 3rd printing.

 

For the purposes of real-life testing and viability I'd go with your wisdom.

 

For the purpose of exploring price distribution though and the 3 scenarios for a bit of holiday fun if anyone has the time or inclination, maybe it could be educational?....

 

I tried to attach a few hours of T&S data from my X Trader but the file is 3.34 MB - too much for the websites limit

 

If anyone can tell me how to do such a test in excel, (other than RTFM) and I'll see if I can come up with something useful - 1 days T&S is probably only useful for the first test, but I can down load 30min and daily data for the 2nd & 3rd.

The only reason I got into this probability thing is because I heard professional poker players use it somehow. They dont have Tape or Dom but somehow they make money by using probabilty. I wanted to see if It could help me in trading.

 

It would be interesting to see your T&S data. I'm into the order flow stuff myself. You can try to upload it to a free file hosting site like filefactory.com or you can record a video with camtasia. Or if you want me to record a video I can too. I actually have some videos with T&S, just tell me what kind you want.

[MightyMouse 12]

The only reason I got into this probability thing is because I heard professional poker players use it somehow. They dont have Tape or Dom but somehow they make money by using probabilty. I wanted to see if It could help me in trading.

 

It would be interesting to see your T&S data. I'm into the order flow stuff myself. You can try to upload it to a free file hosting site like filefactory.com or you can record a video with camtasia. Or if you want me to record a video I can too. I actually have some videos with T&S, just tell me what kind you want.

 

Poker is a whole different game. You can talk about probabilities because a deck of cards is subject to being normally distributed.

[TradeInVertigo 10]

If I where playing a game where someone flips a coin and I have to guess which side it lands on, what are my odds of me being right? 50% right?

 

If I use the coin flip to make a trade(heads go long, tails go short) it is still 50% chance of being right. But I believe this is true if the TP and SL are equal distance from the entry.(TP=2 and SL=2)

 

The question is, If I now increase stop to 3 and keep TP and 2, is there a higher probability of it hitting my TP since it is closer?

 

Thanks.

 

 

If you do have an inverse Risk-Reward mechanism, then it's imperative that you must have a really hign winning percantage trading strategy, greater than 82%. Normally, to achieve that result, the strategy aims for small to medium profits.

 

Otherwise, It's generally hard to achieve 'Positive Expectancy' results when aiming for large profit and aiming for high winning percentage at the same time due to inherent risk of losing all fund.