Probability of Next Trade

zedDoubleNaught · May 25, 2011

I'm currently at:
Strategy actions: wait/skip/enter/long/short/hold/exit/adjust stop/adjust limit

Using the feedback loop of consecutive trades, one more action to add: abandon or review strategy (after a larger than expected losing or winning streak)

The reasoning as, there is a low probability the current system is still valid given the larger than expected streak.

This increases the variety of the strategy, to increase its ability to respond to what the market does, thus increasing the Requisite Variety, I suppose by one bit.

I hope there is another concept or wikipedia article to include, to get to the next step ...

AdamG_SMB · May 25, 2011

imo the requisite variety idea is off the mark and far over-complicates something that is actually very simple.

can u post an excel sheet with the trades? date and P&L as % (or otherwise standardized) are all that you need.

Quote from zedDoubleNaught:

I'm currently at:
Strategy actions: wait/skip/enter/long/short/hold/exit/adjust stop/adjust limit

Using the feedback loop of consecutive trades, one more action to add: abandon or review strategy (after a larger than expected losing or winning streak)

The reasoning as, there is a low probability the current system is still valid given the larger than expected streak.

This increases the variety of the strategy, to increase its ability to respond to what the market does, thus increasing the Requisite Variety, I suppose by one bit.

I hope there is another concept or wikipedia article to include, to get to the next step ...

zedDoubleNaught · May 25, 2011

Quote from AdamG_SMB:

imo the requisite variety idea is off the mark and far over-complicates something that is actually very simple.

can u post an excel sheet with the trades? date and P&L as % (or otherwise standardized) are all that you need.

I didn't test it out, more trying to reason by the theory alone. I agree, it's probably not a practical approach and there are probably simpler ways to improve trade performance. Also I'm more in the trade independence camp. But, I'm interested in theory that challenges my thinking, assumptions, beliefs, or in new concepts I haven't heard of.

For a practical approach, I use a system stop -- trade until it hits a pre-set number of consecutive losses. The next trade may be a win or loss with same probability, or not. I don't know, best to cut losses short, the market may have changed. I've found my strategies don't perform the same forever, they either expire eventually or revert to some longer term probability that my limited backtesting missed (I've seen that discussed in threads too).

markd01 · May 28, 2011

Quote from AdamG_SMB:

You can do a simple analysis that will help. You don't have to guess or assume! if you have a large enough sample of trades that are arranged in chronological order:

1. calculate the simple probability that a trade is a winner. this is simply the win% for the set. (This is Prob(A))

2. now calculate the conditional probability that a trade is a winner, given that the previous trade was a winner. (This is Prob(A|B)) Go through your trades and select only the trades that follow winning trades, and copy them to a separate sheet. Now, calculate the probability of this set.

if Prob(A) <> Prob(A|B) you may have some autocorrelation in your system returns. there are issues of sample size, etc to consider, but this is a very simple and rough way to get some intuition about the concept.

imo, everyone is overcomplicating this. some systems are uncorrelated, most aren't. you can do analysis and figure it out. in my experience though, a strategy like the OP suggested usually does not work very well. there certainly could be exceptions.

OK, looking at my 199 trades done this year and ordered by entry date, I have
Prob(A) = 0.6281
Prob(A|B) = 0.6400

Also, just in case it helps, my rolling average of last 20 trades' win rate:
AVERAGE 62.81%
MEDIAN 65.00%
MIN 30.00%
MAX 90.00%

Is the extra win rate of +0.0119 on a sample size of 199 trades statistically significant to conclude that my system exhibits autocorrelation?

bigdavediode · May 28, 2011

Try a Pearson Correlation Coefficient with your returns staggered by one to see if they're autocorrelated.

Zero would be uncorrelated, -1 would be negatively correlated (a loss followed by a win or vice-versa) and 1 is strongly positively correlated (wins followed by wins.)

It's not ideal because it assumes a std dev, which itself assumes a normal distribution -- but it's a start. As well that kind of leads you to look at the distribution of your returns to see their normality (or lack thereof), kurtosis, etc.

Studying this can only help you. Good luck.

AdamG_SMB · May 28, 2011

Nope. Probably noise.

Quote from markd01:

OK, looking at my 199 trades done this year and ordered by entry date, I have
Prob(A) = 0.6281
Prob(A|B) = 0.6400

Also, just in case it helps, my rolling average of last 20 trades' win rate:
AVERAGE 62.81%
MEDIAN 65.00%
MIN 30.00%
MAX 90.00%

Is the extra win rate of +0.0119 on a sample size of 199 trades statistically significant to conclude that my system exhibits autocorrelation?

bearmountain · May 31, 2011

Quote from zedDoubleNaught:

But, I'm interested in theory that challenges my thinking, assumptions, beliefs, or in new concepts I haven't heard of.

Thank you zed and others for your contribution to this thread. I learned a lot.

FWIW. here is the trade series from today, Tues 5/31/11

P1-P2-L3-P4-P5-P6-P7-P8

My goal is to turn the trade series into a indicator/system

I came up with a simple rule to wait for a losing trade. take the next two trades. then stop and reset. wait for the next sequence.

So I took P4 and P5. netted 1 ES pt. terriable slippage as usual.

p=profit. L=loss. 6 trade number. total system generated trades today were 8

feedback, comments, good, bad, ugly all welcome.
I will try to keep this post up for the rest of this week. Thanks.

Visaria · May 31, 2011

Quote from hoodooman:

BEAR MOUNTAIN: A system is profitable 65% of the time.
----------------------------------------------
STOP RIGHT THERE.

I trade two systems. One has an 88% win rate and the other is 92%

Find an edge and then start trading.

You're quoting high win rates and equating them with an edge, which is nonsensical.

bearmountain · Jun 1, 2011

FWIW. trade series from today, Wed 6/1/11

P1-P2-L3-P4-P5-P6-P7-P8-L9-P10-P11-P12

following the rules, waiting for a loss, I took P4, P5 and then
P10, P11

net after comm, slippage, 2 ES pts

system was 83% profitable. but lost $60

feedback, comments, good, bad welcome. Thanks

oilfxpro · Jun 1, 2011

Quote from bearmountain:

Unfortunatly statistics is not my strong suit. I have a question about probability of win/loss of the next trade after a loss or losing trade.

A system is profitable 65% of the time.

When I drill down to the Losing series of trades (consecutive losing trades). 90% of the time, after 2 losing trades there is a winning trade. About 75% of the time there is a winning trade after one losing trade.

So my question is, what about just taking a trade after waiting for one or two losing trades?

So trade one profit, trade two profit, trade three loss.
Why not just wait to take a trade after trade three?

In black jack when the card count is high, the odds favor a player to bet big. Isn't the same true here?

I am sure I am not the first person to think of this, what are the issues involved with such a strategy?

Thans very much.

All systems fail when market conditions change, there is random distribution of profits and losses.You could get period of 30 losses to 3 wins ,if market conditions become less favourable to your system.

Past performance of a system is no guarantee of future.