How do you calculate risk/reward and probability?

[plav]

Thank you panzerman.
Where is this example from?

 

[Tradess0610]

My main style of trading is discretionary based on fundamentals. I use TA for entry and sometimes exit. Be a discretionary trader its hard to back test markets I know the future of (or past future…).

But surely you have a library of your past trades?
How long have you been trading the strategy, how many trades did you do?

 

[deaddog]

I know my stop and my target but both numbers are pulled out of my ass. I read about successful traders and their “high probability” trades and I’m curious how they figure the probability.

there's a good possibility that they use support and resistance for their exit strategy rather than pulling numbers out of their ass.

 

[smallfil]

My main style of trading is discretionary based on fundamentals. I use TA for entry and sometimes exit. Be a discretionary trader its hard to back test markets I know the future of (or past future…).

Therein lies a huge problem. If you cannot backtest your trading system, how do you know it is positive expectation and you have an edge versus negative expectation and you do not have an edge and merely gambling? Discretionary trading is also, hard because you end up dealing with your emotions and trading based on your emotions, 90% of the time ends pretty badly. Reactive trading that is mechanical is much better. You react after the stock has moved then, enter. A mechanical trading system has rules you have to follow to the letter. No ambiguity, no guessing of where to enter and where to exit. Then, you can measure if it has a positive expectation and trading edge which is what matters.

 

[usettastack]

I’m looking to refine my game. I need to start filtering my trades by risk/reward and probability. I have no idea how to do this. Any advice? Any reading recommendations?

Hi, I'm tracking nodes. Thanks to bsc nodes rpc, I can see the number of transactions, their increase or decrease. With this information, I draw conclusions and decide whether the cryptocurrency will increase or decrease. I consider this an effective way, because when you see that transactions have increased, it means that larger specialists have seen a good forecast and started buying! Try it.

 

[alistera]

I’m looking to refine my game. I need to start filtering my trades by risk/reward and probability. I have no idea how to do this. Any advice? Any reading recommendations?

Actually there are a very specific set of top down numbers that very few have which dictate that exact equation, everything you will read is from the bottom up pushing the boundaries of what works for that individual (but is not transferable) until it invariably fails, but as a baseline anything above 1-2% return on capital per month and you move your probability of loss to a logarithmic curve, not exponential, actually even 1-2% per month is failing today but no one will have noticed that yet!

 

[toucan]

The calculation of risk/reward and probabilities when talking about the underlying instrument is always going to have huge error margins.

Using options to calculate risk/reward and probabilities is more straightforward. Although using options still have error margins in the calculations because of assumptions about market movements, such as price change distributions being normally distributed.

One example, see attached.

hi... that pdf portion is very interesting... do you have the complete pdf?

thanks
toucan

 

[murray t turtle]

I’m looking to refine my game. I need to start filtering my trades by risk/reward and probability. I have no idea how to do this. Any advice? Any reading recommendations?

%%
NOT advice, but good example .
QQQ =88% buy, barchart.com opinion .But its based on tech indicators mostly.
Since you asked in a leverage context\OK /SQQ is a 100% sell. barchart .com opinion
Some people use sell meaning short, but looks like SQQ is a 100% sell.
As far as hi%, one can look @ % of long funds + billions AUM ,+long term profits ;
and % of short funds+ smaller AUM + long term profits..............................
As far as risk, i try to figure out a worst case loss+ add a bit to that

 

[Laissez Faire]

My main style of trading is discretionary based on fundamentals. I use TA for entry and sometimes exit. Be a discretionary trader its hard to back test markets I know the future of (or past future…).

Unless your entry is completely mechanical and can be back-tested programmatically, you pretty much need to do this manually bar-by-bar on historical charts and take notes/statistics systematically.

And yes. It's a lot of work.

 

[virtusa]

Unless your entry is completely mechanical and can be back-tested programmatically, you pretty much need to do this manually bar-by-bar on historical charts and take notes/statistics systematically.

And yes. It's a lot of work.

And then he should calculate the expectancy: (Win % x Average Win Size) – (Loss % x Average Loss Size)