If I couldn't find non-random situations where the probability was weighted heavily in my favor, I wouldn't trade. Others can't, don't know how, or don't believe it is possible. Not my problem or the problem of the many profitable traders who know how to find an edge. Here's the big secret: you need to figure a way of testing the how good an entry is without worrying about an exit as a first step. Make some metric that compares it against random, that has meaning for the timeframe you trade. Then, once you get an entry that beats random you can design exits to extract the $$. While trading you have to monitor the entry metric to make sure things proceed "as advertised"-- at some point things will change and the earlier you see it the better.
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Do you have a EDGE over the market?
- Thread starter benysl
- Start date
If I couldn't find non-random situations where the probability was weighted heavily in my favor, I wouldn't trade. Others can't, don't know how, or don't believe it is possible. Not my problem or the problem of the many profitable traders who know how to find an edge. Here's the big secret: you need to figure a way of testing the how good an entry is without worrying about an exit as a first step. Make some metric that compares it against random, that has meaning for the timeframe you trade. Then, once you get an entry that beats random you can design exits to extract the $$. While trading you have to monitor the entry metric to make sure things proceed "as advertised"-- at some point things will change and the earlier you see it the better.
How about this scenario
A coin toss game turn up Head Head Head 3 times in a row
Coin Player A
Believe that tail is due and believe that tail has a higher chance of coming up next
Coin Player B
Did a backtest of the last 1000 toss and found that after 3 head in a row the next throw is more likely to be head than tail. He believe that head will turn up the next throw
Coin Player C
Did a backtest of the last 2000 toss and found that almost 70% of the toss that end up 3 Head in a row will result in the next toss being tail.
In the above scenario regardless of what system they are using, the next toss will still be a 50/50 game.
Trading scenario
Trader A did a backtest with his most favorite system with a 70% winning rate using MA, Stochastic, MACD what have you. His system show a LONG signal with a profit of 1 point and stop loss 1 point away.
Trader B using a counter trend has the exact same entry price but it is a short position at the same prices.
Regardless of whatever system or backtest, method, the moment they enter the trade. Trader A go long while trader B go short, the probablitilty of the market going up 1 point and going down 1 points is 50/50.
AGREE??
A coin toss game turn up Head Head Head 3 times in a row
Coin Player A
Believe that tail is due and believe that tail has a higher chance of coming up next
Coin Player B
Did a backtest of the last 1000 toss and found that after 3 head in a row the next throw is more likely to be head than tail. He believe that head will turn up the next throw
Coin Player C
Did a backtest of the last 2000 toss and found that almost 70% of the toss that end up 3 Head in a row will result in the next toss being tail.
In the above scenario regardless of what system they are using, the next toss will still be a 50/50 game.
Trading scenario
Trader A did a backtest with his most favorite system with a 70% winning rate using MA, Stochastic, MACD what have you. His system show a LONG signal with a profit of 1 point and stop loss 1 point away.
Trader B using a counter trend has the exact same entry price but it is a short position at the same prices.
Regardless of whatever system or backtest, method, the moment they enter the trade. Trader A go long while trader B go short, the probablitilty of the market going up 1 point and going down 1 points is 50/50.
AGREE??
Quote from benysl:
you enter a trade at 6500 with a target profit at 6510 and stop loss at 6490, your chances of hitting either side is 50/50. From a mathetician and statistic point of view, how do we increase the change to greater than 50%
if we cannot we got no edge or advantage.
Another scenario you enter long at 6500 target at 6520 and stop loss at 6490, your chances of hitting 6520 for a 20 ticks gain is only 33% while your chances of hitting 6490 for a 10 ticks loss is 66%
1 more scenario
You buy Microsoft at 65.00 set a stop loss at 63.00 and a profit targe at 69.00. Why do you allow a 2.00 stop loss? Why not set a stop loss at 64.80, isnt a 0.20 stop loss better than a 2.00 stop loss. We know if we set a 0.20 stop loss we will have a 95.238% chances of hitting it first before it hit the profit.
we are taught to belief let profit run and cut losses short
the problem with this is if profit > stop loss, the chances of hitting stop loss will be greater than hitting profit
These figures are probably true if you enter randomly but
how do you explain the people who do make consistent money? There must be situations where the odds become favorable.
Quote from benysl:
How about this scenario
A coin toss game turn up Head Head Head 3 times in a row
Coin Player A
Believe that tail is due and believe that tail has a higher chance of coming up next
Coin Player B
Did a backtest of the last 1000 toss and found that after 3 head in a row the next throw is more likely to be head than tail. He believe that head will turn up the next throw
Coin Player C
Did a backtest of the last 2000 toss and found that almost 70% of the toss that end up 3 Head in a row will result in the next toss being tail.
In the above scenario regardless of what system they are using, the next toss will still be a 50/50 game.
Trading scenario
Trader A did a backtest with his most favorite system with a 70% winning rate using MA, Stochastic, MACD what have you. His system show a LONG signal with a profit of 1 point and stop loss 1 point away.
Trader B using a counter trend has the exact same entry price but it is a short position at the same prices.
Regardless of whatever system or backtest, method, the moment they enter the trade. Trader A go long while trader B go short, the probablitilty of the market going up 1 point and going down 1 points is 50/50.
AGREE??
Not quite, in the coin scenario (assuming the coin is perfect) generaly speaking there are no outside forces that may influence the outcome beside gravity, wind, etc.
In the maket, however, the shorter the time frame the greater the chances that one may encounter 'external' forces that could influence the outcome of an expected price point. I am refering to MM holding the bid in order to force buyers to come out of the fences, a short term reaction to a pivot, a program trading action due to the movement of the futures markets, etc.
The trick or edge is to be able to replicate past observations of the reaction of the market under certain circumstances.
Take the Yuan revaluation today, you may argue that this event had a 50/50 chance of ocurring, however, if the event were to happen, a move in the dollar vs the yen would almost be certain.
To speculate on this, one simply needed a small understanding of market correlations for example and some guts.
Quote from easyrider:
These figures are probably true if you enter randomly but
how do you explain the people who do make consistent money? There must be situations where the odds become favorable.
Trading scenario
Trader A did a backtest with his most favorite system with a 70% winning rate using MA, Stochastic, MACD what have you. His system show a LONG signal with a profit of 1 point and stop loss 1 point away.
Trader B using a counter trend has the exact same entry price but it is a short position at the same prices.
Regardless of whatever system or backtest, method, the moment they enter the trade. Trader A go long while trader B go short, the probablitilty of the market going up 1 point and going down 1 points is 50/50.
Thus that is the topic of the threads how do we gain an extra edge from a maths point of view??
Quote from PetaDollar:
If I couldn't find non-random situations where the probability was weighted heavily in my favor, I wouldn't trade. Others can't, don't know how, or don't believe it is possible. Not my problem or the problem of the many profitable traders who know how to find an edge. Here's the big secret: you need to figure a way of testing the how good an entry is without worrying about an exit as a first step. Make some metric that compares it against random, that has meaning for the timeframe you trade. Then, once you get an entry that beats random you can design exits to extract the $$. While trading you have to monitor the entry metric to make sure things proceed "as advertised"-- at some point things will change and the earlier you see it the better.
This is a good post.
I'm sure you won't be upset when it gets almost totally ignored.
do trends exist?
find a way to bet in the direction of the trend. why? because a trending market isn't the same as a trend in coin flipping. why? because peoples beliefs and psychology influence the outcome of the next mkt movement....whereas no beliefs or psych. influence the next coin flip result.
Therefore coin flipping trends will only ever be 50/50, but market trends are manmade, thus exploitable.
there's your edge.
is it 51/49? for 2to1 rvr? i have no idea.
i try not to be concerned with win rate...let the scalpers be concerned with that (as they should be).
The way i look at it (maybe i'm right, maybe i'm wrong) is that you can either play the %'s or play the RvR.
it's kind of like poker where you can either play the 'man' or play the cards.
I choose to play the RvR game. i only need about a 36% win rate to BE over time.
But if i was scalping using your logic that (i have a higher probability when price=50....tgt=51....stop=48)....ok that's true, i would more likely hit 51 than 48...but i have not been able to figure out how I can handle a streak of losing trades (and all systems have streaks) when i'm losing more than i'm winning.
however, when i'm playing the RvR game, the losing streaks are easily overcomeable when i start to win again.
This is what i think anyway, but you don't have to agree with me to make money in the market.
find a way to bet in the direction of the trend. why? because a trending market isn't the same as a trend in coin flipping. why? because peoples beliefs and psychology influence the outcome of the next mkt movement....whereas no beliefs or psych. influence the next coin flip result.
Therefore coin flipping trends will only ever be 50/50, but market trends are manmade, thus exploitable.
there's your edge.
is it 51/49? for 2to1 rvr? i have no idea.
i try not to be concerned with win rate...let the scalpers be concerned with that (as they should be).
The way i look at it (maybe i'm right, maybe i'm wrong) is that you can either play the %'s or play the RvR.
it's kind of like poker where you can either play the 'man' or play the cards.
I choose to play the RvR game. i only need about a 36% win rate to BE over time.
But if i was scalping using your logic that (i have a higher probability when price=50....tgt=51....stop=48)....ok that's true, i would more likely hit 51 than 48...but i have not been able to figure out how I can handle a streak of losing trades (and all systems have streaks) when i'm losing more than i'm winning.
however, when i'm playing the RvR game, the losing streaks are easily overcomeable when i start to win again.
This is what i think anyway, but you don't have to agree with me to make money in the market.
Quote from benysl:
Trading scenario
Trader A did a backtest with his most favorite system with a 70% winning rate using MA, Stochastic, MACD what have you. His system show a LONG signal with a profit of 1 point and stop loss 1 point away.
Trader B using a counter trend has the exact same entry price but it is a short position at the same prices.
Regardless of whatever system or backtest, method, the moment they enter the trade. Trader A go long while trader B go short, the probablitilty of the market going up 1 point and going down 1 points is 50/50. I dont have any math to back me up but having traded this setup hundreds of time I can say it works very well. I cant back this up with any math but having traded this setup hundreds of times I know it works very well.
Thus that is the topic of the threads how do we gain an extra edge from a maths point of view??
You remind me of a couple of other guys here. Too intelligent. So caught up in the math that you will probably have a hard time trading. In the attached chart I can assure you that the odds favor reaching the target before the stop.
Attachments
Quote from easyrider:
You remind me of a couple of other guys here. Too intelligent. So caught up in the math that you will probably have a hard time trading. In the attached chart I can assure you that the odds favor reaching the target before the stop.
haha not a hard time trading. I have a couple of system running on that is my traders edge that I have. Now that I discover how I can improve the maths edge, I am trading live over the next 2 weeks to see if the maths edge has a advantage for me.