Odds Automatically Against You

[crgarcia]

Quote from antincedo:

just a curious question.. why is it that it seems as a trader with no knowledge of trading has less than a 50% chance of being right? when one can only go long or short


why does it seem that one needs an edge just to have a 50% success rate?

Mainly bid-ask spreads and commission costs.

 

[CasperCRF]

Commissions can be big when you are just starting out. My first year I lost $10k, $7,500 of that was commissions alone.

 

[theboxer]

Quote from dtrader98:

Depending on how you look at it, there is some truth in your words. Trader or not, in a simple coin toss with only two outcomes the odds are already stacked against you. Assume you are compounding with a dollar bet and the possible outcomes are:

-1,-1
1,-1
-1,1
1,1

What is the probability that you will get a successful return off just these 2 tosses? It's not 50% as most would presume. It's pretty mind blowing when you 1st encounter it.

Note that net expectation over many trials is a different beast; but it requires that you make it to those many trials first.

With -1,-1, you lose $2
With -1,1, you break even
With 1,-1, you break even
With 1,1, you win 2$

The odds are 50/50 in this case. In other words your expected outcome is $0, with you chance of losing $2 being equal to winning $2. No matter how many coin tosses you tried, the expected value would still be $0, with an equal chance of winning or losing money. That is in effect 50/50.

I see what you're saying: that the odds of actually making a profit in this scenario is only 1/4. But the odds of losing money are only 1/4 also: since the odds of winning and losing are equal, I think this satisfies the 50/50 that the poster was talking about.

 

[dtrader98]

Quote from theboxer:

With -1,-1, you lose $2
With -1,1, you break even
With 1,-1, you break even
With 1,1, you win 2$

.

wrong. Notice I specifically mentioned compounding. Now run it again under that assumption (if you are trading, it's a pretty good assumption). You can also assume just about any fixed% wager return under this scenario, as it will not change the probability of the outcome, it's more clear on larger returns; say +/-50 or 100%.

Assume your initial dollar is all you have and there are two possible outcomes for the coin toss as outlined in the truth table. What is the probability of a successful return (in excess of your wager) at the end of two tosses? Not 50%.

 

[Rocko1]

Quote from antincedo:

just a curious question.. why is it that it seems as a trader with no knowledge of trading has less than a 50% chance of being right? when one can only go long or short


why does it seem that one needs an edge just to have a 50% success rate?

It's like any other game, the newbies are completely oblivious of how reality operates then they naturally tend to fail.

 

[theboxer]

Quote from dtrader98:

wrong. Notice I specifically mentioned compounding. Now run it again under that assumption.

Assume your initial dollar is all you have and there are two possible outcomes for the coin toss as outlined in the truth table. What is the probability of a successful return (in excess of your wager) at the end of two tosses? Not 50%.

I see.

 

[Sky123987]

Quote from antincedo:

just a curious question.. why is it that it seems as a trader with no knowledge of trading has less than a 50% chance of being right? when one can only go long or short


why does it seem that one needs an edge just to have a 50% success rate?

Because of the cost of entering in and out of the mkt.

1) If you enter at market you are entering at a price worse than (bid + ask) / 2

2) If you enter at limit your average fill price will be worse than (bid + ask) / 2... often times worse than just sending a mkt order.

 

[mister_doodi]

You would be losing every time you enter a trade through spread and commissions, when in case of a noob futures trader, he would be down couple ticks and when it goes down an another tick or two he would get scared and close out. Then he watches as the contract go his way and beat his desk in anger and thus, the start of loser mentality.

 

[TraderZones]

Quote from antincedo:

when one can only go long or short

Who said only long or short?

The market can go up.

The market can go down.

The market can go sideways

The market can become choppy or chaotic, stopping you out and THEN turning profitable.

Money management is a big part of this.

 

[intradaybill]

Quote from TraderZones:

Who said only long or short?

The market can go up.

The market can go down.

The market can go sideways

The market can become choppy or chaotic, stopping you out and THEN turning profitable.

Money management is a big part of this.

Excellent points! Trading is not as simple as tossing a coin, whether biased or not.