AriaS
Well-known member
- Messages
- 264
- Likes
- 103
*Sharing my post from other forums*
Random win probability
I often like to calculate the random win probability of my strategies to see whether it’s luck or a real edge:
First, we need to calculate the probability of a random trade to become a winner.
Here’s the formula: (average loss - average spread) / (average loss + average win)
My new strategy: (42.45 pips - 1.5 pips) / (42.45 pips + 22.3 pips) = 0.632
This means that a random trade has the probability of 63.2% to become a winner. That’s very reasonable: an average winning trade of my strategy is smaller than an average losing trade, so TP has a higher probability to happen compared to SL
Now we must calculate the binomial distribution. I like this online calculator .
I have 71 winning trades out of 84, so “number of flips” = 84, and we need to have “at least” 71 heads, at “probability of heads” = 0.632.
The result is 0.000014375 or 1 in 69,566 chance of success.
This indicates that the outcome is a result of an edge, rather than luck.
Why is this calculation important? For example, if I had only 60 winners out of 84 trades, the strategy would still be in profit, but then the probability of that to happen would be 1 in 14 . Such high probability could suggest luck, rather than an edge. We would not be confident in such a strategy’s success in the future.
P.S. Why the average spread must be subtracted: spread shifts our entry against us, therefore TP is harder to reach. The probability to reach it with spread=0 should be higher, than with spread>0.
Let’s check two examples that both have SL=TP=10 pips. The 1st has no spread and the 2nd has spread=1.
Random win probability
I often like to calculate the random win probability of my strategies to see whether it’s luck or a real edge:
First, we need to calculate the probability of a random trade to become a winner.
Here’s the formula: (average loss - average spread) / (average loss + average win)
My new strategy: (42.45 pips - 1.5 pips) / (42.45 pips + 22.3 pips) = 0.632
This means that a random trade has the probability of 63.2% to become a winner. That’s very reasonable: an average winning trade of my strategy is smaller than an average losing trade, so TP has a higher probability to happen compared to SL
Now we must calculate the binomial distribution. I like this online calculator .
I have 71 winning trades out of 84, so “number of flips” = 84, and we need to have “at least” 71 heads, at “probability of heads” = 0.632.
The result is 0.000014375 or 1 in 69,566 chance of success.
This indicates that the outcome is a result of an edge, rather than luck.
Why is this calculation important? For example, if I had only 60 winners out of 84 trades, the strategy would still be in profit, but then the probability of that to happen would be 1 in 14 . Such high probability could suggest luck, rather than an edge. We would not be confident in such a strategy’s success in the future.
P.S. Why the average spread must be subtracted: spread shifts our entry against us, therefore TP is harder to reach. The probability to reach it with spread=0 should be higher, than with spread>0.
Let’s check two examples that both have SL=TP=10 pips. The 1st has no spread and the 2nd has spread=1.
- Spread=0: (10-0)/(10+10)=0.5 : The probability to reach TP is 50%
- Spread=1: (10-1)/(10+10)=0.45 : Here, when we do have spread, the probability to reach TP is lower - 45%
