Probability in Trading

pbylina · Dec 30, 2011

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.

scose-no-doubt · Dec 30, 2011

Well that depends on whether you believe that short term price movement is random. If you consider each up/down tick to be independent of the last then there are X combinations for path of the price before you stop/target get hit innit blad.

Draw up a decision tree or some shizen, I dunno.

Emini-mouse · Dec 30, 2011

pbylina · Dec 30, 2011

scose-no-doubt said:
Well that depends on whether you believe that short term price movement is random. If you consider each up/down tick to be independent of the last then there are X combinations for path of the price before you stop/target get hit innit blad.

Draw up a decision tree or some shizen, I dunno.

Yes, we are assuming price movement is random.

A 3 tick stop loss and 2 tick TP = 60% probability of hitting TP ?
A 8 tick stop loss and 2 tick TP= 80% probability of hitting TP?

the hare · Dec 30, 2011

Dont let any more cats out of the bag. You've said more than enough already

Mornington Crescent · Dec 30, 2011

If its all random then its extremely unlikely that if you tossed a coin 100 times that it would land 50/50

is somebody using a normal distribution curve perchance ?

Masquerade · Dec 30, 2011

oh boy...this is a mess

Stay away from trading if you're going to think like that.

bedsit · Dec 30, 2011

pbylina said:
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.

It depends on a few other factors.

scose-no-doubt · Dec 30, 2011

pbylina said:
Yes, we are assuming price movement is random.

A 3 tick stop loss and 2 tick TP = 60% probability of hitting TP ?
A 8 tick stop loss and 2 tick TP= 80% probability of hitting TP?

I'm not very well versed in statistics and I've never really looked into it but it's never struck me as being that simple.

scose-no-doubt · Dec 30, 2011

I reckon Teh Sigmas are Teh Way personally but then as I said, my comprehension of teh applications of binomials in trading decision (I'm assuming this would have to be some sort of algorithmic process) is non-existent.

scose-no-doubt · Dec 30, 2011

Anyone care to tell me why I'm talking sh1t? I'm fairly certain I am.

Lord Flasheart · Dec 30, 2011

havent really studied the thread but if you are flicking a coin,then all outcomes become a zero sum equation whatever your targets and stops are. However if you believe your setup in trading is slightly above 50% then all equations become magnified and too your advantage

pbylina · Dec 30, 2011

Lord Flasheart said:
havent really studied the thread but if you are flicking a coin,then all outcomes become a zero sum equation whatever your targets and stops are. However if you believe your setup in trading is slightly above 50% then all equations become magnified and too your advantage

Thats what I thought. At 50% your profit is 0. How does someone get over that 50% ?

pbylina · Dec 30, 2011

If it doesnt matter what size the stop loss is then should we not use one? I heard pros dont use stop losses...

brewski1984 · Dec 30, 2011

I think this subject has been covered many times and was one of the first ideas I had. The conclusion has always been that it doesn't work like that.

scose-no-doubt · Dec 30, 2011

That which doesn't work like what? That your EV can be computed by X - entry or that binomials aren't applicable?

Mornington Crescent · Dec 30, 2011

I suspect the other flaw with this approach is that the market is not random.
its either fractal or a quantum world

its worth checking how much you would lose with 15 losses in a row

the hare · Dec 30, 2011

pbylina said:
Thats what I thought. At 50% your profit is 0. How does someone get over that 50% ?

You have other variables to play with in addition to just win rate, plus a bunch of other really obvious stuff !

You need to have this discussion on a trading site really

pbylina · Dec 30, 2011

the hare said:
You have other variables to play with in addition to just win rate, plus a bunch of other really obvious stuff !

You need to have this discussion on a trading site really

Whats a good trading site?

Masquerade · Dec 30, 2011

Masquerade's Trading System - usually £815.30

RANDOM.ORG - Clock Time Generator
+
RANDOM.ORG - Coin Flipper

Probability in Trading

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