probability

[jem]

timbo got it right. I started seeing the term used a lot for the first time in the late 90s by people selling their stuff - particularly on trading markets (which was tradehard.com at the time).

I would say if you make money almost every day - and you losing days are smaller than your winning days you could legitimately say you have a high probability system. (assuming you have traded through all sorts of markets.)


If your profit depends on your mind set or a coach or a guru keeping you focused and psyched up - you have no edge and you are not trading with high probability.

 

[JimmyJam]

Quote from Andy_Trade:

What is the proper way to calculate the probability of a trade being profitable in the end?

Thanks

The problem with this thread is that, first and foremost, the OP could not define what type of probability he was talking about for what type of tradeable instrument.

Once the probabability of trade is determined, which, for directional trading, is simply that when:
a) Condition X sets up, and
b) Condition Y sets up, and/or
c) Condition Z sets up
there will be an xx% of S happening, and xx% of F happening, where S is definied as a trade that ends in success (a profit), and F is defined as a trade that ends in failure (a loss).

Now, for directional trading, when you factor in R:R (Risk:Reward) you can further alter the probability of S and F, with the smaller increment the Reward being, the increased probability of S (success) of the trade.

For directional trading, a decent probability is 75% success/25% failure, so long as the Risk:Reward for such a probability is at least 1:1 or greater, you have created a system which ultimately will succeed. Also, by making your goal a target dollar amount which represents a modest amount of the average range to be achieved everyday, you can increase the probability of success to over 90%.

A trader by the name of 5Pillars did a substantial amount of work in this area, you would do well to review his writings on this forum.

Good trading,

Jimmy Jam

 

[IV_Trader]

Quote from JimmyJam:



For directional trading, a decent probability is 75% success/25% failure, so long as the Risk:Reward for such a probability is at least 1:1 or greater, you have created a system which ultimately will succeed.

card's counters made millions in BJ with only 52/48 and 1:1...so...what 75/25 profits looks like ?

 

[commiebat]

Quote from IV_Trader:

card's counters made millions in BJ with only 52/48 and 1:1...

Casinos do even better with thinner margins and higher payouts. But they (both counters and casinos) place enough bets that their returns converge to the mean. Also, they both need a lot of liquidity to ride out deviations from the mean.

You get a few bets a month, and you have to make them count. And your liquidity is limited by your wealth and Reg T.

I think of options as insurance policies. You want to insure what you consider to be good risks, buy re-insurance (hedge) against catastrophe, and cancel policies when the patient gets sick (cut losses).

 

[JimmyJam]

Quote from IV_Trader:

card's counters made millions in BJ with only 52/48 and 1:1...so...what 75/25 profits looks like ?

pretty good once you figure it out.

JJ

 

[IV_Trader]

Quote from commiebat:

Casinos do even better with thinner margins and higher payouts. But they (both counters and casinos) place enough bets that their returns converge to the mean. Also, they both need a lot of liquidity to ride out deviations from the mean.

You get a few bets a month, and you have to make them count. And your liquidity is limited by your wealth and Reg T.

I am not sure if I understand. Are you saying that trader MUST have 75/25 ( on only few trades a month) to stay in biz/not to blow of ? But even at 75/25 one can easily have 10-15 negative trades , so what then ?
Hey , if ET consensus is 75/25 at 1:1 is normal, so be it.

 

[IV_Trader]

Quote from JimmyJam:

pretty good once you figure it out.

JJ

Good for you , JJ
BTW , 75/25 at 1:1 is only 50% monthly return. Sound very normal and reasonable for a zero sum game

 

[JimmyJam]

Quote from IV_Trader:

Good for you , JJ
BTW , 75/25 at 1:1 is only 50% monthly return. Sound very normal and reasonable for a zero sum game

Exactly ... that's why I made reference to 5Pillars' work and getting to a probability of 90% or higher.

Good trading,

JJ

 

[IV_Trader]

You mean this 5Pillars ?

"Go to Persia.....banks pay over 18% interest on funds that you are not trading.

Buy Persian rugs at wholesale within Iran from smaller communities where they are manufactured, and then ship them to Dubai and sell at high retail.....between the bank earned income and the rug sales you should easily do a 100% + return a year."

Where is he now ? I heard people buying sheeps in Chechnya and selling 'em in Kabul for an e-a-s-y 5000% return. I wonder if he can hook me up with Iranian banks to fund the operation.
Just messing with ya , JJ...nice trading all.

 

[commiebat]

Quote from IV_Trader:

I am not sure if I understand. Are you saying that trader MUST have 75/25 ( on only few trades a month) to stay in biz/not to blow of ?

What I'm saying is that you can't trade a bunch of options randomly and rely on bare probabilities to make your money. You have to do whatever you can to increase your odds.

The thing is, with directional plays you can never really improve your risk/reward ratio too much by combining positions and holding to expiry, because options tend to be fairly priced. The more likely you are to profit, the smaller the profit and the greater the cost when you lose. Vertical spreads are an excellent example, because the credit and debit are each directly (to first order) proportional to the probability of realizing it.

Winning more trades than you lose is a good start, but the ultimate goal is to win more money than you lose. That means managing the losses, closing and rolling positions gone bad. It also means cashing winnings before they evaporate.

It also also means you need some kind of edge other than bare options statistics, so you should be a reasonably good stock picker if you play directionally. Decent stock-picking and nonstupid option selection appropriate to your stock-picking should easily give you 75% wins.

A well-behaved stock whose price you can predict is worth more than all the options knowledge and IV in the world.

EDIT: Also, it's a red herring that options are zero-sum. The people who make the market aren't fighting you for a finite pile of money, they're completely delta-hedged against the non-zero-sum equity market. It is actually possible for everyone with an option position to make money.