Question about probability in trading forex

sweil

Newbie
1 0
Hi all, just a quick thing I was wondering about.

If I am a short-term trader and I have a system that produces no edge (i.e. just random entry trading), does that mean that if I take hundreds of trades--with my overall reward/risk ratio being 2:1 over the long-run (i.e. years)--- does that mean in the long-run my winning percentage is around 33% thus my profit would essentially be $0? Assuming transaction costs etc.. are taken out of the picture.

Just a thought. So If a system has some sort of edge and it produces a 2:1 ratio over the long-run, the winning percentage of the system would essentially be higher than 33% right? giving long-term profit?

Thanks :D
 

robertofx

Active member
139 1
Hi all, just a quick thing I was wondering about.

If I am a short-term trader and I have a system that produces no edge (i.e. just random entry trading), does that mean that if I take hundreds of trades--with my overall reward/risk ratio being 2:1 over the long-run (i.e. years)--- does that mean in the long-run my winning percentage is around 33% thus my profit would essentially be $0? Assuming transaction costs etc.. are taken out of the picture.

Just a thought. So If a system has some sort of edge and it produces a 2:1 ratio over the long-run, the winning percentage of the system would essentially be higher than 33% right? giving long-term profit?

Thanks :D

Need some math here. Try to develop spreadsheet to do an advanced analysis
 

Rhody Trader

Senior member
2,620 266
If I am a short-term trader and I have a system that produces no edge (i.e. just random entry trading), does that mean that if I take hundreds of trades--with my overall reward/risk ratio being 2:1 over the long-run (i.e. years)--- does that mean in the long-run my winning percentage is around 33% thus my profit would essentially be $0? Assuming transaction costs etc.. are taken out of the picture.

Retail forex being a negative sum market, if you have no edge then you are almost certainly going to be losing money. Any large number of completely random trades would be expected to no net average a loss of the spread.

Just a thought. So If a system has some sort of edge and it produces a 2:1 ratio over the long-run, the winning percentage of the system would essentially be higher than 33% right? giving long-term profit?

That's correct.
 

James McCabe

Newbie
2 0
Hi all, just a quick thing I was wondering about.

If I am a short-term trader and I have a system that produces no edge (i.e. just random entry trading), does that mean that if I take hundreds of trades--with my overall reward/risk ratio being 2:1 over the long-run (i.e. years)--- does that mean in the long-run my winning percentage is around 33% thus my profit would essentially be $0? Assuming transaction costs etc.. are taken out of the picture.

Just a thought. So If a system has some sort of edge and it produces a 2:1 ratio over the long-run, the winning percentage of the system would essentially be higher than 33% right? giving long-term profit?

Thanks :D

Hi,

assuming if everything zero influence and only up and down, and you only trade 1 direction, you will have 50% odds for all of the trades Long / Short, adding the risk : reward 1 : 2 equal to 33%
100 trades - 66% failed 33% success time 2 yes right it will produce around $0,

but forex is not as simple as that, there are several things to note:
- When trend already established, the 50:50 odds might go higher or lower depend on your direction, adjacent with trend = more than 50%, opposite of trend = less than 50%.
- You will have risk:reward 1:2 , this thing change the probability because it's not equal event, add spread and commission if present and the probability not 50% anymore.
- If you alternating between long and short, the probability will become more complex, if you take long / short only then there was method that is famous (Dollar cost averaging).
 
 
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