Calculating High Probability Trades

PollyM

Active member
195 7
Is this thread entirely about the age old problem of trade location vs trade confirmation?

i.e. the more confirmation you wait for, the further price has moved away and therefore the lower the profit opportunity

As you appear to be using indicators which are derivatives of price, they will always lag price and therefore reduce the profit opportunity.

Interesting though, especially the way you have modelled it.
robster970

If a benchmark can be established based on trading price alone then this will help new traders objectively gauge the characteristics of other trading systems.

PollyM
 
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PollyM

Active member
195 7
#8

The attached charts show the Ft and St results for the remaining trading systems of RSI, PSAR, MACD and INDE, together with selected outcomes for SMA, EMA and ADX extracted from the above matrices and charts.

The RSI system chosen for this analysis is a simple crossover at the central 50 line.

The PSAR and MACD trading systems are as set out by Wilder and Appel respectively, keeping with their default settings across the board.

The INDE trading system is a simplified version of the Directional Movement System, stripped back to its bare essentials, similar to the +DI/-DI crossover signals. As with ADX, it also uses the accumulation technique.

The matrices corresponding to the attached charts will be presented in the next post, where we will get our first insight into the realtime calculation, that is, the actual returns that you would expect to experience as you follow the exact trading signals outputted by your chosen platform, both before and after trading costs.


Group Ft Chart.jpg

Group St Chart.jpg
 

PollyM

Active member
195 7
#9

The attached matrices show the Ft and St results across all the trading systems, and correspond to the charts attached to post #8 above.

Also presented are two realtime calculations, Rt being the basic or raw realtime calculation before trading costs (eg spread), and R+ being the realtime calculation once the spread ‘cost’ of each and every trade is taken into consideration.

In this case the trading cost equates to a typical FTSE100 spread on a retail spreadbetting platform, again so to seek the worst case scenarios in this analysis. For our calculations, the spread ‘cost’ is set at 1 point. Any finance charges for rolling over any positions are not included in these calculations, but they are generally negligible relative to spread.

The accumulation technique used in the simplified INDE trading system allows the accurate calculation of the realtime returns for each accumulation factor setting. This is constructed on a spreadsheet to enable each trade to be revealed every step of the way. Similar results for realtime could also be outputted for ADX with a little adjustment to the spreadsheet formulae, although this becomes increasingly more challenging to construct for those trading systems which employ moving average techniques (eg SMA, EMA, MACD).

It is not that the accumulation technique is a more advanced method of calculation than moving averages, albeit having an inherent smoothing action, it is just easier to deconstruct when you’re looking to recreate or walk through possible scenarios.

Wilder often employs the accumulation technique in the calculations documented in his book New Concepts In Technical Trading System, and this is a good introduction for any new traders interested in learning more about it.

The overlaying of the Rt and R+ outputs on both the Ft and St charts helps to reveal the actual order of events, with the Ft expectations being shown to be generally overstated or over-optimistic, and the St expectations being shown to be generally understated or under-optimistic.


Group FtRt Matrix.jpg

Group FtRt Chart.jpg

Group StRt Matrix.jpg

Group StRt Chart.jpg
 

PollyM

Active member
195 7
#10

Rt and R+ are the ‘somewhere in between’ propositions mentioned in post #1 above, which have now been mathematically reconstructed when applied to historical data.

This degree of validation establishes a preliminary benchmark and helps to provide an impetus for further analysis and empirical testing through live trading.

Taking a moment to reflect on the characteristics of the mathematical results, they broadly show us a range of profitable pathways, as well as relatively thorny ones. In other words, it can be said they show us the high probability trade routes, as well as the low probability ones.

The referencing of trade probabilities will vary according to the framework with which you choose to trade. In this case, where the adopted framework focuses on trading one market constantly, the assessment of probabilities is seen to be a relative proposition*.

For example, you can say that trading the FTSE100 1 Hour at an accumulation factor of 3 has a higher probability of profit growth than trading the FTSE100 1 Hour at an accumulation factor of 21. And trading the FTSE100 1 Hour at an accumulation factor of 21 has a higher probability of profit growth than trading the FTSE100 1 Hour at an accumulation factor of 144.

In calculating ‘high probability trades’ within this framework you are therefore first calculating probability pathways across time. Along the relatively higher probability pathways, all of the trades nestled within the particular trading system you choose to adopt are essentially by definition ‘high probability trades’, whether or not individually they yield a profit or a loss.

It is the cumulative result which matters, not how many trades are profit making and how many are loss making, as you will find that to seek a positive cumulative result through constant trading you will experience a mix of everything. It confirms that within such a framework where you are not trading ‘blind’, there is simply no need to attach yourself to having to make every single trade a profit making one, as you know that over time the results will on balance produce a rising equity curve. In other words, you are trading with foresight, not hindsight.

That brings to an end this series of posts on ‘calculating high probability trades’. I have some other ideas for further posts and may return with these in the future.

*If you choose to trade by an alternative method, say by seeking out set pieces instead of trading the open play, then this would require a different and more complicated method of assessment altogether.
 

subarashi

Junior member
45 3
This is an interesting thread. Every trader is interested in getting a better trade. Have you considered using Bayesian inference with Markov Chain Monte Carlo Simulation methods applied to short time series to forcast future volatility.

There is a lot of research going on in that area and as traders are primarily interested in the short term and probably only have access to short term data: up to 5 years, this might be a fruitful way to go.
 

PollyM

Active member
195 7
For new traders I feel it is best to keep it simple and see how far the basic tools can take you. I like the INDE system because it is simple, and the analysis shown above is really the tip of the iceberg. Tested to the extreme the INDE system can reveal some interesting results.

The accumulation factor can be made smaller than 3, and is not limited to integers, and decimal numbers can be used. Or to develop it further you could even try to construct a system which 'trades' the equity curve so that you are only in the market when the profitable windows are opening.

The difficulty I have with predictive models is that they are just that, models. They are all based on human mathematics, which is limited. The financial markets exhibit a natural mathematics which is a infinite gestalt of exquisite imbalances. It is always throwing curve balls. Don't ask me how it does it, but it's light years ahead of the rational human mind.

Remember that too many flawed premises is a house of cards.
 

neil

Legendary member
5,167 745
For new traders I feel it is best to keep it simple and see how far the basic tools can take you. I like the INDE system because it is simple, and the analysis shown above is really the tip of the iceberg. Tested to the extreme the INDE system can reveal some interesting results.

The accumulation factor can be made smaller than 3, and is not limited to integers, and decimal numbers can be used. Or to develop it further you could even try to construct a system which 'trades' the equity curve so that you are only in the market when the profitable windows are opening.

The difficulty I have with predictive models is that they are just that, models. They are all based on human mathematics, which is limited. The financial markets exhibit a natural mathematics which is a infinite gestalt of exquisite imbalances. It is always throwing curve balls. Don't ask me how it does it, but it's light years ahead of the rational human mind.

Remember that too many flawed premises is a house of cards.
Total Bollox and pure lultz:whistling
 
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neil

Legendary member
5,167 745
Show me your way with the same amount of precision. I like detail, bring it on.
I have nothing to prove or desire to puff my ego as you appear to do. But look up price action plus support and resistance which is all many people need.:whistling

Ps.
Is your first name Albert and have you a penchant for purple prose
 

PollyM

Active member
195 7
I have nothing to prove or desire to puff my ego as you appear to do. But look up price action plus support and resistance which is all many people need.:whistling

Ps.
Is your first name Albert and have you a penchant for purple prose
Show me how price action plus support and resistance equals profit. You are talking as an artist having now learnt all of this. New traders are on the road to developing this artform, and a mathematical approach can help.

Come back to me when you can show me that you can show others how to trade. This is a 'First Steps' forum.
 

PollyM

Active member
195 7
APPENDIX

Attached is a barebones INDE platform in Excel format. It's open source so you can modify it as much as you wish. Some customising examples are given on the YouTube indetrader channel (switch to HD quality for clearest screenshots).

If you don't have Excel you can download OpenOffice and open/save it in OpenCalc. If you have Excel then the only main difference when modifying is to use commas instead of semicolons.

It's all contained on one worksheet: inputs, outputs, engine and charts. Columns BCDE are the inputs for your own price data; the specimen data can be deleted. For small accumulation factors you don't really need to start with 40 rows of inputs, so you can modify to suit. As each new price bar opens in normal time you simply insert a new line below the last price line (ie the one above the grey zone), then copy and paste the last price line to this new line and adjust the time/price inputs accordingly.

You may also want to keep track of your equity in columns JK.

If you want to trade more than one market (not always necessary if you learn how to trade one market well), then simply copy/create a new worksheet and change the inputs accordingly.

It can also be converted into a testing platform by inserting/copying/pasting a greater number of lines. This is best done in Excel as it has a much quicker processing speed.

When the number of price lines becomes too cluttered on your screen/charts then just highlight the topmost price rows, right click, then click 'Hide' (click Unhide/Show to reverse this process).

A good way to start is to have it running in the background to your other trading activities, possibly trading daily prices on an index at a small to medium accumulation factor, small stake to begin with.

You can also practice the process on intraday data, paper trading or using very small stakes, so that you can become used to the system of making inputs and adjusting stops.

Watch out for 'outside days', they are the biggest curve balls, but in time you will find your way around them.

If you have any queries as to operation then please post.


View attachment INDE.xls
 

walker49

Newbie
5 0
APPENDIX

Attached is a barebones INDE platform in Excel format. It's open source so you can modify it as much as you wish. Some customising examples are given on the YouTube indetrader channel (switch to HD quality for clearest screenshots).

If you don't have Excel you can download OpenOffice and open/save it in OpenCalc. If you have Excel then the only main difference when modifying is to use commas instead of semicolons.

It's all contained on one worksheet: inputs, outputs, engine and charts. Columns BCDE are the inputs for your own price data; the specimen data can be deleted. For small accumulation factors you don't really need to start with 40 rows of inputs, so you can modify to suit. As each new price bar opens in normal time you simply insert a new line below the last price line (ie the one above the grey zone), then copy and paste the last price line to this new line and adjust the time/price inputs accordingly.

You may also want to keep track of your equity in columns JK.

If you want to trade more than one market (not always necessary if you learn how to trade one market well), then simply copy/create a new worksheet and change the inputs accordingly.

It can also be converted into a testing platform by inserting/copying/pasting a greater number of lines. This is best done in Excel as it has a much quicker processing speed.

When the number of price lines becomes too cluttered on your screen/charts then just highlight the topmost price rows, right click, then click 'Hide' (click Unhide/Show to reverse this process).

A good way to start is to have it running in the background to your other trading activities, possibly trading daily prices on an index at a small to medium accumulation factor, small stake to begin with.

You can also practice the process on intraday data, paper trading or using very small stakes, so that you can become used to the system of making inputs and adjusting stops.

Watch out for 'outside days', they are the biggest curve balls, but in time you will find your way around them.

If you have any queries as to operation then please post.


View attachment 151216
Hi, Thanks for taking the time here. I have downloaded the form full of figures but as yet I cannot work out what the strategy is. I have found one strategy on binary options which I will try and it goes like this 1) look for a clear trend 2) then look for a stochastic on the 5 minute time frame which goes under the 20 line and then above with some separation for a long2) the 15 minute and the 1 hour trend and stochastic must be going in the same direction 3) only buy the option when there is less than say 25 minutes before expiry. With a set up like this of one per day and losing one in four, this should give a steady income. The problem with this strategy is finding the set up. Maybe it will occur once a day.

Regards

John
 

PollyM

Active member
195 7
You can let the market come to you.

With the system you have quoted, by the time you can see a 'clear trend' you will have missed the trade.

Have a read through the earlier posts in this thread to get a feel for the INDE strategy, and you can always search the internet for more material on the INDE system of trading.

Post at any time if you need to run through anything.
 

graydrake

Junior member
39 1
Good Morning Polly

I have recently begun a thread on high probability credit stock option trading. I am looking for collaboratros, since in periods of low volatility I can not find sufficient trades that meet my rules. I assess all potential trades based on a number of individual metrics, and measure the effective annualized return of each completed trade as well as the portfolio in general based on annualized return, ie a trade that returns 21% of the margin requirement in 1/10 of a year has yieded a 210% return on an annualized basis.

What is the numerical result of your system by this measurement, over what time frame and with how many trades?

Drake
 

PollyM

Active member
195 7
Hi Drake

The INDE system of trading is primarily a benchmark reference for new traders entering the market, setting out 'relative' probabilities for various standard indicators across various timescales. As such it doesn't generate the specific information that you seek, although could be modified to do so with it being spreadsheet based.

Just going off at a tangent, one of the first things a trader should do is learn to backtest properly, as there are so many flawed calculations out there. Once you know how to do this you begin to realise that it really is a fine line between profit and loss, but having said that it is not insurmountable and is a matter of practicing process so that your emotions have less influence on decision making.

In one way, it sounds as though your trading rules are serving you well, as in times of low volatility (presuming you mean little natural up/down movement) there is often little to trade, and these are the times when losses can accrue, and the knack is to keep these as small as possible. Remember that even day traders depend in part on the much longer wavelengths of trend, as it is the longer wavelengths which provide the most tradeable intra-day ranges.

In all cases, it is best to let the market come to you which, I agree, can be frustrating at times, but if you've backtested thoroughly then you know that your system will kick in again once the market moves back into major trend.
 

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