## Why is high probability trading so important?

This is a discussion on Why is high probability trading so important? within the First Steps forums, part of the Reception category; it is true to say that no money is earned by a trade entry,...it is the exit that determines whether ...

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 Mar 3, 2009, 12:49pm #3 Joined Dec 2008 The basic problem is that the math's behind making money is counter-intuituve to what we're taught from a very young age about success/failure. Simple example. Which is best: a) 80% win rate @ £2 per win b) 60% win rate @ £5 per win c) 40% win rate @ £10 per win Most people would plump for either (a) or (b) as they feel like winning ratios (i.e. > 50%). Reality is (c) has the best risk-weighted return. You understand the maths, you don't have a problem. Knowledge conquers fear every time.
Mar 3, 2009, 12:56pm   #4
Joined Dec 2004
Quote:
 Originally Posted by robster970 Most people would plump for either (a) or (b) as they feel like winning ratios (i.e. > 50%). Reality is (c) has the best risk-weighted return.
Actually, without also knowing the average loss we can't really make any judgements here.
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John Forman, PhD

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 Mar 3, 2009, 1:44pm #5 Joined Mar 2005 And frequency, Expectancy x number of trades = total income. I'm doing alright on expectancy, but it comes with low frequency unfortunately.
Mar 3, 2009, 2:38pm   #6

Joined Dec 2008
Quote:
 Originally Posted by Rhody Trader Actually, without also knowing the average loss we can't really make any judgements here.
The point was more to illustrate people's mindset's to perceived success/failure rather than the specifics of whether risk adjusted-win > risk adjusted-loss. As my opening sentence was about the counter-intuitive nature of the math's I'm surprised with your comment which is correct but contextually missing my point.

Considering most newb's take time to adjust to this premise I thought it was important to highlight it.

Mar 3, 2009, 3:38pm   #7
Joined Dec 2004
Quote:
 Originally Posted by robster970 The point was more to illustrate people's mindset's to perceived success/failure rather than the specifics of whether risk adjusted-win > risk adjusted-loss. As my opening sentence was about the counter-intuitive nature of the math's I'm surprised with your comment which is correct but contextually missing my point. Considering most newb's take time to adjust to this premise I thought it was important to highlight it.
It was a good start you had, but you didn't complete the discussion by taking the newbie where they needed to go. You rightly took the conversation beyond win %, but left it hanging with an incomplete way of looking at things by having still only looked at the one side of the equation.. That's why I made my comment.
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John Forman, PhD

Mar 3, 2009, 3:43pm   #8

Joined Dec 2008
Quote:
 Originally Posted by Rhody Trader It was a good start you had, but you didn't complete the discussion by taking the newbie where they needed to go. You rightly took the conversation beyond win %, but left it hanging with an incomplete way of looking at things by having still only looked at the one side of the equation.. That's why I made my comment.
Now that makes tons of sense. Duly noted for future explanations.

 Mar 3, 2009, 6:00pm #9 Joined Jan 2003 Interesting replys to the post. I deliberately placed the thread in the 'First Steps' forum because it is an issue that affects newbies more than experienced traders. To this exent Lance Beggs wrote an interesting related article here: T2W Day Trading & Forex Community I think the main point is that, yes we all know that a lower strike rate trading edge with a higher risk:reward can make a net gain over a sample, but the difficulty comes in allowing the sample to play out because of the isssues raised in the post. These difficulties/barriers should not be underestimated. An inexperienced trader facing say the 5th/6th consecutive loss not only has a higher rate of recovery to contend with, they probably also don't know the historical strike rate of their trading edge (% of winning trades of total trades) so that they are unaware of the potential it has for a consecutive losing run/drawdown. The corollary of this is that they are probably overleveraged given the historical strike rate such that the loss incurred falls outside of their comfort zone and therefore detsabilises their ability to act with impunity at the trading edge when it next presents itself. __________________ I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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 Mar 3, 2009, 6:13pm #10 Joined Mar 2005 It really is necessary to test a method (and not crunched/optimised through Tradestation or something). In other words have your hypothesis and test it; sophisticated analysis perhaps, but blunt and robust trading parameters. When you have done this and you have your W/L rate, win%, Sharpe ratio etc. the trading becomes quite tranquil and eventually boring. I'm trying to make Market Profile applicable to FX , and currently up to April 2004 in the sample. Totally irritable to be honest, but by doing this I'm seeing already that the market doesn't make its ranges in convenient time slots which end on a Friday. Just quantifying what is really a simple approach - breakouts from congestion, but definitely worth the effort. Note: sorry to labour the point, but literally scrolling back and doing the trades by hand, noting what the maximum possible gain was on the trade, how tight the stop could have been, and whether scaling out would have succeeded where an all-in/all-out approach would have failed, for example Last edited by Joey25; Mar 3, 2009 at 6:35pm.
Apr 25, 2013, 2:00am   #12
Joined May 2012
Re: Why is high probability trading so important?

Quote:
You do have a point and that is there is a difference between potential loss and expected value of loss (which is probability X potential loss).

Personally my experience is that if stops are kept too tight it is very often counter productive and degrades my overall trade results.

Apr 25, 2013, 2:31am   #13
Joined Jul 2012
Re: Why is high probability trading so important?

Quote:
 Originally Posted by Brumby You do have a point and that is there is a difference between potential loss and expected value of loss (which is probability X potential loss). Personally my experience is that if stops are kept too tight it is very often counter productive and degrades my overall trade results.
I do not use stop losses, but use limit sells for profit on every trade.

My entry always includes a vision of where the ticker price will move relative to the market. When my vision is violated it is time for an exit. Since I never enter a trade without a major downside (upside for bear trades) level of protection, generally market moves will not drive my trade into a loss. But when the ticker has a mind of its own, that runs counter to the market and against my vision an exit is triggered, usually at a loss occurs. This loss however is generally much lower than max.

My point really is that the option talking heads seem to always recommend trades where max profit is a multiple of potential loss. Most of my trades the potential loss is 4 times the potential gain - but my win/loss ratio and early exit ratio makes up for the difference.

Drake

Apr 10, 2017, 4:23pm   #14
Joined Apr 2017
Quote:
 Originally Posted by bbmac Interesting replys to the post. I deliberately placed the thread in the 'First Steps' forum because it is an issue that affects newbies more than experienced traders. To this exent Lance Beggs wrote an interesting related article here: T2W Day Trading & Forex Community I think the main point is that, yes we all know that a lower strike rate trading edge with a higher risk:reward can make a net gain over a sample, but the difficulty comes in allowing the sample to play out because of the isssues raised in the post. These difficulties/barriers should not be underestimated. An inexperienced trader facing say the 5th/6th consecutive loss not only has a higher rate of recovery to contend with, they probably also don't know the historical strike rate of their trading edge (% of winning trades of total trades) so that they are unaware of the potential it has for a consecutive losing run/drawdown. The corollary of this is that they are probably overleveraged given the historical strike rate such that the loss incurred falls outside of their comfort zone and therefore detsabilises their ability to act with impunity at the trading edge when it next presents itself.
The more inportant aspect of the first post is the phsychology , which most seem to neglect and misunderstand.

Apr 11, 2017, 6:47am   #15
Joined Apr 2017
Quote:
The above is the important message , high probability trading will reduce overtrading and mistakes .When the rational brain shuts down as per orignal poster , trader's make mistakes The difference between the winning traders and losers is the mistakes they make .So read about trader's mistakes and trading mistakes

Just search google for "trader's mistakes and trading mistakes".The articles in this forum cover some of them

Take only 1 trade in the morning and 1 in the afternoon , the reason is our emotional brain is faster than the rational brain , the emotional brain influences trading decisions and hijacks rational trading .The limit of 1 trade , is a ploy against the emotional brain taking over .After a loss , block the emotional brain , by not trading any further for another 4 hours , by which time emotions will cease

Amygdala_hijack: emotional responses from people which are immediate and overwhelming, and out of measure with the actual stimulus because it has triggered a much more significant emotional threat