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I just realized something huge...
- Thread starter RangeTrader
- Start date
Thanks!Quote from RangeTrader:
Here is an example on the euro...
So in your example you are assessing the relative frequencies at which certain events play out (in this case, the relative frequencies of N successive higher (or N lower) closes).
If the sample is big enough (how are you deciding that?) you can take the relative frequencies as probabilities of each outcome occurring.
I think that makes good sense; you are assessing the strength of the "signal" independently of "backtest noise" from trade entries and exits, so the risk of curvefitting is reduced to some degree. I wouldn't claim the idea is original, though ...
Now, lets calculate out some quick odds on the S&P bigger picture so you guys understand why the pro's are so complacent...
Lets assume that the market behavior since 2004 is the norm.
What are the statistical odds of a reversal provided the market locks in a double engulfing reversal?
If we lock in this double engulfing reversal that we currently have into the end of this month... The odds of us having a full reversal next month are 0%.
By October our odds of a reversal start to increase rapidly. Judging from past markets moving at this trend speed... Our odds of reversal increase to above 90% after seven months after the initial engulfing reversal.
Lets assume that the market behavior since 2004 is the norm.
What are the statistical odds of a reversal provided the market locks in a double engulfing reversal?
If we lock in this double engulfing reversal that we currently have into the end of this month... The odds of us having a full reversal next month are 0%.
By October our odds of a reversal start to increase rapidly. Judging from past markets moving at this trend speed... Our odds of reversal increase to above 90% after seven months after the initial engulfing reversal.
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Quote from abattia:
Thanks!
So in your example you are assessing the relative frequencies at which certain events play out (in this case, the relative frequencies of N successive higher (or N lower) closes).
If the sample is big enough (how are you deciding that?) you can take the relative frequencies as probabilities of each outcome occurring.
I think that makes good sense; you are assessing the strength of the "signal" independently of "backtest noise" from trade entries and exits, so the risk of curvefitting is reduced to some degree. I wouldn't claim the idea is original, though ...
Did I claim the idea was original? No.
I just realized that the difference between me and others was I was using technicals for analyzing odds of events occurring... I have never bought/sold off stupid technical signals like crossovers ever. I only buy/sell places that are high odds tops/bottoms in trend.
I changed my signals to dots because the way I have always been using them is as probabilities...
Like during this high speed uptrend into this year... The larger the dot during the uptrend the higher the probability of a forward dip. Enough pros have the probabilities calculated out so a lot of the time they are almost self-fulfilling certainties.
This is the problem I am convinced most traders have... They have a mental block in trading off of probabilities... They are searching for certainties when there are only probabilities!
Like during this high speed uptrend into this year... The larger the dot during the uptrend the higher the probability of a forward dip. Enough pros have the probabilities calculated out so a lot of the time they are almost self-fulfilling certainties.
This is the problem I am convinced most traders have... They have a mental block in trading off of probabilities... They are searching for certainties when there are only probabilities!
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So, let me re-word my SPX daily analysis down to pure probabilities lingo.
"The probability that the S&P 500 dips below the highs of today toward late week is very high, however the probability of a sufficiently profitable dip is so low that the trade isn't worthwhile. Then there is also a 80%+ probability that the market moves higher next cycle. The only thing that can shift these probabilities is a large unexpected news catalyst like a Iran war or Greece bankruptcy."
It's much better to trade when the market is moving with a large range and high momentum in my opinion because it reduces the effect of unexpected news events shifting probabilities.
"The probability that the S&P 500 dips below the highs of today toward late week is very high, however the probability of a sufficiently profitable dip is so low that the trade isn't worthwhile. Then there is also a 80%+ probability that the market moves higher next cycle. The only thing that can shift these probabilities is a large unexpected news catalyst like a Iran war or Greece bankruptcy."
It's much better to trade when the market is moving with a large range and high momentum in my opinion because it reduces the effect of unexpected news events shifting probabilities.