An Apparent Veneer of Structure over Random Chaos

[Sigma-D]

I’ve no idea if or just how much the forex market at short timeframes can be considered random or not, but if you start with the premise that it is, then you should in theory hit as many winners as losers, all things being equal. Which raises the question why so few even manage to achieve that quite average win/loss ratio. So what inequality drivers do losing traders bring to the party that makes things worse than just a steady bleed of spread from their trading capital? What do we do which makes our trading worse than a random coin toss?

In theory, I should be able to draw two lines on chart, one above the current price and one an equal distance below the current price, toss a coin to decide direction and use those lines as stop and target and 50% of the time I should get a win and 50% a loss. I’d lose net spread on each trade and drain my account over time, but not as fast as I am now.

I could get ‘clever’ and decide if there was any discernible bias to price, is it clearly moving upward over time or downward over time and use that as a decider for direction rather than a coin toss. Or I could use support and resistance levels as those lines. But would that be my first mistake if price movement is effectively random - to assume it is not and one level has significance over any other?

Perhaps the passage of time is the key. The more time you’re in a trade the more time it has to move around. Maybe if I did two sets of lines one set above and one set below the current price and closer to the price. Enter whichever of the two inner lines gets breached first and exit on the next? The closer the lines to each other and the price, the more likely one will be triggered sooner and exited equally quickly.

Does any of the above make sense?

 

[Sigma-D]

The more I consider it I think on the shorter timeframes in forex time is the key factor. You're more likely to get a move of 10pips than 20, 20 than 40. I've been thinking that the number of pips you get in the move is the prime determinant to profitability. It isn't. It's the number of winning trades compared with the number of losing trades winnings and losses being approximately equal.

A 10 pip move with a 10 pip stop is as good as a 100 pip move with a 100 pip stop. Better actually in that it's more likely to happen.

So does this mean the probability of a winning trade over a losing trade is the prime determinant in trading profitability and the return/risk a secondary issue?

 

[NVP]

sure - makes sence

try it .......build an EA that takes random trades every X number of bars and see what happens ...........

there are also a few reasons why traders will still lose even getting that 50% success rate (aside from spreads) and I'm sure others will tell you why now

its funny - the more expereinced you get the less random the market becomes to you

N

 

[NVP]

The more I consider it I think on the shorter timeframes in forex time is the key factor. You're more likely to get a move of 10pips than 20, 20 than 40. I've been thinking that the number of pips you get in the move is the prime determinant to profitability. It isn't. It's the number of winning trades compared with the number of losing trades winnings and losses being approximately equal.

A 10 pip move with a 10 pip stop is as good as a 100 pip move with a 100 pip stop. Better actually in that it's more likely to happen.

So does this mean the probability of a winning trade over a losing trade is the prime determinant in trading profitability and the return/risk a secondary issue?

Hey S

why is a 10 pip move with a 10 pip stop more likely to happen than a 100 pip move with a 100 pip stop ?


just wondering dude ...........

N

 

[Sigma-D]

why is a 10 pip move with a 10 pip stop more likely to happen than a 100 pip move with a 100 pip stop ?

Obviously the size of your stop has no significance in the probability of the move, but price is more likely to move 10 pips than 100 pips.

 

[NVP]

Obviously the size of your stop has no significance in the probability of the move, but price is more likely to move 10 pips than 100 pips.

sure ......price will move 10 pips quicker than it will move 100 pips

but it doesnt mean the % probability/results will be any different on the eventual outcome of 10 or 100 pip targets ..........it just takes longer for the 100 pip challenges to conclude

N

 

[Sigma-D]

sure ......price will move 10 pips quicker than it will move 100 pips

but it doesnt mean the % probability/results will be any different on the eventual outcome of 10 or 100 pip targets ..........it just takes longer for the 100 pip challenges to conclude

N

Wouldn't you prefer 10 X 10 pip wins with 10 pips stops than 1 X 100 pip win with 100 pip stop?

 

[Sigma-D]

The 10 pip stop and 10 pip target is nonsense. The logic of smaller targets relative to current price makes sense I think, but where the spread represents such a large percentage of the stop on entry, it's like the zero on the roulette wheel. That's probably a large part of why we do less well than random chance. We need to make the stop (and target) very large with respect to operational costs. Which is in direct opposition to the point I was making about keeping the targets small. There are more swings and roundabouts in trading than at Alton Towers.

 

[timsk]

Wouldn't you prefer 10 X 10 pip wins with 10 pips stops than 1 X 100 pip win with 100 pip stop?

Hi Sigma-D,
I'd prefer the latter as the costs (spreads) are a mere 10% of the former.

Tim.

 

[Sigma-D]

Hi Sigma-D,
I'd prefer the latter as the costs (spreads) are a mere 10% of the former.

Tim.

Yes, just talked myself out of that with the post just above yours for precisely that reason.

 

[ffsear]

Wouldn't you prefer 10 X 10 pip wins with 10 pips stops than 1 X 100 pip win with 100 pip stop?

If i'm risking 2% of my account on each trade (as i do).; Then I'd take the 1 trade for 100 pips. As opposed to 10 trades with a combined risk of 20% of my account

 

[Sigma-D]

If i'm risking 2% of my account on each trade (as i do).; Then I'd take the 1 trade for 100 pips. As opposed to 10 trades with a combined risk of 20% of my account

Yes, with yours and timsk's comments there is a consensus building which is adding to the suspicion I was beginning to harbour about the risk of playing for stakes for which the spread/costs is a significant factor.

 

[Trader333]

The answer to the original question is quite simply that most people cut winners short and let losers run and that is all there is to it.

 

[tar]

Yes, with yours and timsk's comments there is a consensus building which is adding to the suspicion I was beginning to harbour about the risk of playing for stakes for which the spread/costs is a significant factor.

How about scalping with a tight SL risking 0.2% instead of the so called 2% benchmark , aiming to get that runner every now and then ... dynamic R:R

 

[Sigma-D]

The answer to the original question is quite simply that most people cut winners short and let losers run and that is all there is to it.

Is there a way to determine which is which?

 

[timsk]

Is there a way to determine which is which?

Sigma-D,
As far as I'm aware, only from a probabilistic point of view. In other words, if your methodology has a success ratio of 70%, you know that every trade you take is roughly twice as likely to result in a profit than it is in a loss.
Tim.

 

[Sigma-D]

Sigma-D,
As far as I'm aware, only from a probabilistic point of view. In other words, if your methodology has a success ratio of 70%, you know that every trade you take is roughly twice as likely to result in a profit than it is in a loss.
Tim.

No, I meant if you know which are the winner and which are the losers you'll know which to allow to continue and which to kill.

 

[timsk]

No, I meant if you know which are the winner and which are the losers you'll know which to allow to continue and which to kill.

Well, if traders can work that one out, they'll only ever take winning trades and losing trades will be a thing of the past. That's quite high on the list entitled 'Holy Grail' fantasies!

Tim.

 

[Sigma-D]

Well, if traders can work that one out, they'll only ever take winning trades and losing trades will be a thing of the past. That's quite high on the list entitled 'Holy Grail' fantasies!

Tim.

No, I was initially responding to Trader3333’s comment about cutting losers and letting winners run. If it is as simple as that then presumably there is a method to differentiate the two?

 

[Trader333]

I didn't comment on letting winners run and cutting losers short. What I said is that doing the reverse makes most people lose over the long term. Many people let losers run and run hoping the trade will come back into profit until "forced awareness" makes them have to close the trade with a much greater loss than they should have incurred. By the same token I have seen many people get a small way into profit and close the trade for fear of it reversing when there was no indication that it would do. Much of real success is to do with risk management and position sizing appropriately for the level of risk calculated at the entry of any given trade. If you get this aspect correct then profits will come.