Am I missing something?

[Muffhands]

I get the feeling you are a discretionary price action type trader, my advice would be to stop focusing so much on the theoretical/mathematical part of it, and putting more time infront of the screen watching the markets, preferably using a simulator or a paper trading account.

If you enjoy watching charts and trying to predict short term price changes that is a great way to make money, you only have to get profecient at it first. The difficult thing is not to get distracted along the way and devoting time into things that ultimately have little impact on your trading ability.

It's also easier if you focus on one timeframe and one market until you master them.

I do appreciate the input. I spend a lot of time in front of the screen but I realize many times that things are not as they seem at face value, and no matter how confident you are, mathematics and probabilities always work there way into the equation.

I personally do not find any value in trading with a simulator or paper trading account. I did that for a long time at first, and it did get me very comfortable using the software, but I found that paper profits gave me false confidence and did not translate to real profits. Did you find paper trading helpful?

 

[MarkBrown]

all traders suffer from not understanding where they are in the market. they don't know if this is a top or bottom or if it's consolidating to continue the direction it was going. also acceleration, slope, magnitude all come to play and this is where standard deviations help out. at 50/50 you need to have a profit factor about 1.75 at least.

 

[nickynoes]

I do appreciate the input. I spend a lot of time in front of the screen but I realize many times that things are not as they seem at face value, and no matter how confident you are, mathematics and probabilities always work there way into the equation.

I personally do not find any value in trading with a simulator or paper trading account. I did that for a long time at first, and it did get me very comfortable using the software, but I found that paper profits gave me false confidence and did not translate to real profits. Did you find paper trading helpful?

I found a much better use for statistics once I had something to actually work with. In fact, it took me much less time to get proficient at statistics and probability than it did to get proficient at trading.

And yes, simulators and paper trading are probably the most valuable training tools a trader can obtain. If you are unable to reproduce the results in live trading despite following the same plan then you probably need to work on your psychology, not your method.

 

[TommyR]

bullshit also comes into play a lot in trading remember because obviously its useful if you make 1% a year for no one to be able to understand it or even specify what you are aiming to do . whereas at google its very hard for the head of search to not know anything about computers and get away with it for long that is not the case in this business. like its quite possible to have long discussions on whether its actually good or bad to not beat the s and p if you aren't even really trying and whether a hedge fund means u offset winning trades with losing trades or are tail hedge. bizarre imo seems unlikely to last

 

[fan27]

I have been trading for multiple years now with mixed success. I have taken the time to educated myself on different strategies and have found trading index options to be the most comfortable market for me. I would consider myself fairly educated on relating (retail) topics with the exception of some of the more complex topics like options pricing models and some topics in financial mathematics. Now, with my limited knowledge of coding and backtesting capabilities I have tried my best to find a system that will yield a positive expectancy over long term. This system has been working for me in the short term, but I imagine it is what I don't know about probabilities and options pricing that will end up biting me in the a**. Im looking for somebody with a high knowledge level of mathematics/probabilities to give me more of a mathematical answer.

So here is my questions; my system in simple terms, uses daily support and resistance levels to find high prob setups, and a favorable risk reward in order to yield a positive expectancy over many trades. So just using a mean reversion strategy for example; after a decline, I might look for a reversion to the mean, and ALWAYS have a risk reward ratio of 1:2. If my stop is $1 away, my profit target is $2 away. I do not close my trade until one of those levels are hit (stop or sell limit). The most important part of my strategy, is that once the trade is open, I do not close it manually. Either a stop or profit target is hit, and once it happens I am out.

Using this logic, if I can achieve a prob of success of 50%, over 100 trades I should make 50 x $2 = $100, and lose 50 x $1 = $50 for a net gain of $50. Now I know this sounds great to me, but I understand there might be something deeper I am missing, so I am looking for some members with very advanced knowledge of mathematics/probabilities and stock/options pricing to fill me in about what I might be missing. The first thing that comes to mind, is that since my target price is twice as far away as my stop loss, I will have a higher prob of being stopped out more often. BUT, by using moving averages, BB, or other types of support/resistance, I am actually able to predict intra day movements in indices with decent precision.

My question is essentially; Will these predictions be enough to combat the difference in prob of getting stopped out vs prob of hitting profit target? Are stocks and options priced to have a zero expectancy even when using psychological levels of support and resistance, regardless of how well you can predict reversals? Is what I am doing in essence like selling options, where your prob of success might be higher but you will eventually have a zero expectancy? Or does predicting reversals in price action give me an actual EDGE.

Part of me almost thinks of it as scalping, where predicting short term movement seems easier to do, but a few losses end up wiping out your gains for a zero expectancy. But then my risk/reward ratio tells me otherwise. Is anyone able to answer these questions mathematically?

Sorry for the long post.
Thanks in advance.

Is your entry entirely rules based?

 

[Muffhands]

I

Is your entry entirely rules based?

Its discretionary. I look for setups that have a high prob of success, and I only take entries where I see potential for a 1:2 risk reward. I do have some guide lines and setups that I consider attractive.

 

[Handle123]

...

Using this logic, if I can achieve a prob of success of 50%, over 100 trades I should make 50 x $2 = $100, and lose 50 x $1 = $50 for a net gain of $50.
...

Perhaps I am missing something, but where are the fees? 100 times ### equals ?

The problem I see, is reward has to increase to 3 instead of 2, because there are many??? trades where you get out early and never reached two. What do you do if market stalls, or how much time do you give a trade when it not moving your direction? The 50/50 percentage is based on market going your direction initially but not to your target and depending on the Index you are trading can make a difference as well, the ES trades differently than Nasdaq. Someone commented on understanding where you placed trade in the swing or range of the day, have you spent time on studying swings and can understand basic Elliott of so many trend waves and counter-trend waves, so to know when to expect possible reversals are due, also "mean" time it takes to complete a swing/wave. Have you studied extreme formations, ends of movements and these often will reduce rewards. I have found back testing probabilities should not be addressed if the entry is correct, but area of managing the trade works best for me, can only control risk. Sample size 100 way way too small and have to check different amounts of volatility.

Good luck.

 

[fan27]

I

Its discretionary. I look for setups that have a high prob of success, and I only take entries where I see potential for a 1:2 risk reward. I do have some guide lines and setups that I consider attractive.

Sounds like you want to know if you really have an edge. I had the same problem and I solved it by determining how often my strategy beat random entry. I disagree that a sample size of 100 is always to small. To test that, run a simulation of 5000 back tests where you enter randomly over the same data set but use the same exit criteria. How often does your strategy beat random entry? If you beat random entry 95% or more of the time, your sample size is big enough and you likely have an edge. Here is how I approached the problem.

https://www.elitetrader.com/et/threads/strategy-validation.325217/

 

[Muffhands]

Sounds like you want to know if you really have an edge. I had the same problem and I solved it by determining how often my strategy beat random entry. I disagree that a sample size of 100 is always to small. To test that, run a simulation of 5000 back tests where you enter randomly over the same data set but use the same exit criteria. How often does your strategy beat random entry? If you beat random entry 95% or more of the time, your sample size is big enough and you likely have an edge. Here is how I approached the problem.

https://www.elitetrader.com/et/threads/strategy-validation.325217/

Great info in that link. Question; how exactly do you go about backtesting? What software do you use? Where do you acquire your data? Do you need to be familiar with coding in order to backtest? Sorry for the elementary questions.
Thanks for taking the time to respond.

 

[fan27]

Great info in that link. Question; how exactly do you go about backtesting? What software do you use? Where do you acquire your data? Do you need to be familiar with coding in order to backtest? Sorry for the elementary questions.
Thanks for taking the time to respond.

I wrote my own software. What exactly are you trading and what time frames? Also, over what date range did you 100 trades occur.