What are some mathematical misconceptions with regard to trading?

R

rin4et

Please post some mathematical misconceptions that you have encountered with trading.
I will start with one:

People tend to assume that if they have an equal % gain and loss they will end up even or with their starting capital. However, this is not true. A loss does greater damage to your account than an equal % gain will build up your account. In essence people under estimate the power of losses and overestimate the power of gains. Therefore a system with a much higher probability rate is needed to be successful than most people would assume.

For example, if you start with $100 and have a 20% gain followed by a 20% loss or vice versa you end up with $96.
Similarly, if you start with $100 and have eight 10% losses in a row you are down to $43 which means you lost almost 60% of your capital.
Also if you have a 10% loss then you need 11% to get back to break even. Losses do greater damage than the reparation of gains.

Please post other mathematical misconceptions as food for thought!
 
rin4et said:
Please post some mathematical misconceptions that you have encountered with trading.
I will start with one:

People tend to assume that if they have an equal % gain and loss they will end up even or with their starting capital. However, this is not true. A loss does greater damage to your account than a equal % gain will build up your account. In essence people under estimate the power of losses and overestimate the power of gains. Therefore a system with a much higher probability rate is needed to be successful than most people would assume.

For example, if you start with $100 and have a 20% gain followed by a 20% loss or vice versa you end up with $96.
Similarly, if you start with $100 and have eight 10% losses in a row you are down to $43 which means you lost almost 60% of your capital.
Also if you have a 10% loss then you need 11% to get back to break even. Losses do greater damage than the reparation of gains.

Please post other mathematical misconceptions as food for thought!
More...

Here is a mathematical misconception. People out in the real world cannot fathom that 9 can = 7. What the hell is wrong with them! Oi!

Stop trolling for arguments. K Thanks bye.
 
rin4et said:
Stop responding to my thread if you have nothing of value to say. Go do something constructive with your time.
More...

You asked for a mathematical misconception. I gave you one.

"People tend to assume that if they have an equal % gain and loss they will end up even or with their starting capital."

The above quote is you, and that is troll bait. Shirley you cannot be serious.

If you are not careful from this point forward, you're gonna' get snuffed. Seriously, what is your question?
 
You're overthinking trading -- based on your forum question post history.
Just remember... each trading day, or whatever time frame you trade: the chart movement is part art...and part science.
I'm not necessarily going to go in detail what that may mean to you, or whomever individual.

But Good luck, Mazal tov, and May the Farce be With you,

You have to be a skillful, and mindful and mature trader to succeed. Otherwise, most Squares should just do standard local banking of taking in deposits and lending the money out at a higher rate to generate profit. It's very slow, and very tiny profits -- but it's basically a sure thing.

Being a great trader encompasses so many other facets and wisdoms of life; it's not just simply reading a trading book over and over again.
 
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rin4et said:
Please post some mathematical misconceptions that you have encountered with trading.
....
More...

The odds of price moving up 1 unit or dropping 1 unit are 1:1.
NO THAT IS WRONG

There is a bias, find the bias, quantify it, trade in direction of bias when is over 60% (I trade at 70%; because I trade like a woosie, conservative, scared, save my capital above all else, child). There is also a friction loss due to commissions and spreads. That is in addition to the bias.

COROLLARY
That the odds of price moving up 2 and down one is 2:1.
NOPE WRONG AGAIN. THAT IS TERRIBLY WRONG. IT IS MORE WRONG THAN THE 1:1.

Yet that is the standard wisdom foisted on new traders. Trade with a 2:1 risk reward ratio. Put a take profit 2 units up and a stop loss 1 unit down. That sage slogan completely ignores probability. Ignore probability and eventually you lose.

Odds of price do not increase in a linear function.

Might as well also add that the distribution of price is not a normal distribution. Although few people get far enough along to get to that error.

Too much maths at school is taught in the ideal situation so the concept can be understood. Then the teacher gets lazy and does not explain that in the real world it does not work like that.

Price is determined by people. People are subject to fear and greed. Trying to develop models that simulate the results of fear and greed is difficult.

The best I have seen, and what I use, is the concept of clouds of electron probability around an atom. Heisenberg was more then a drug dealer on TV. The fuzziness of electron movement is similar to the fuzziness of price movement. At the very small, quantum mechanics is used to create the mathematical description, that would be inappropriate for use in the price of securities, but conventenial statistics gets me into profit.

Although thinking about price as being both down and up at the same time is an interesting thought experiment. Before you place a trade, the price of a security is both up and down (something to do with a cat).

Statistical models work very well as price predictors. Provided that the limits of reliability are recognized. There is much more to this; but I can feel the dullness of the reader’s eyes starting to glaze over.

Lot's of good Geordie singers over the years.

 
Truth_ said:
The odds of price moving up 1 unit or dropping 1 unit are 1:1.
NO THAT IS WRONG

There is a bias, find the bias, quantify it, trade in direction of bias when is over 60% (I trade at 70%; because I trade like a woosie, conservative, scared, save my capital above all else, child). There is also a friction loss due to commissions and spreads. That is in addition to the bias.

COROLLARY
That the odds of price moving up 2 and down one is 2:1.
NOPE WRONG AGAIN. THAT IS TERRIBLY WRONG. IT IS MORE WRONG THAN THE 1:1.

Yet that is the standard wisdom foisted on new traders. Trade with a 2:1 risk reward ratio. Put a take profit 2 units up and a stop loss 1 unit down. That sage slogan completely ignores probability. Ignore probability and eventually you lose.

Odds of price do not increase in a linear function.

Might as well also add that the distribution of price is not a normal distribution. Although few people get far enough along to get to that error.

Too much maths at school is taught in the ideal situation so the concept can be understood. Then the teacher gets lazy and does not explain that in the real world it does not work like that.

Price is determined by people. People are subject to fear and greed. Trying to develop models that simulate the results of fear and greed is difficult.

The best I have seen, and what I use, is the concept of clouds of electron probability around an atom. Heisenberg was more then a drug dealer on TV. The fuzziness of electron movement is similar to the fuzziness of price movement. At the very small, quantum mechanics is used to create the mathematical description, that would be inappropriate for use in the price of securities, but conventenial statistics gets me into profit.

Although thinking about price as being both down and up at the same time is an interesting thought experiment. Before you place a trade, the price of a security is both up and down (something to do with a cat).

Statistical models work very well as price predictors. Provided that the limits of reliability are recognized. There is much more to this; but I can feel the dullness of the reader’s eyes starting to glaze over.

Lot's of good Geordie singers over the years.

More...
This is a great post! Thank you! It will give me something to think about.
 
Truth_ said:
The odds of price moving up 1 unit or dropping 1 unit are 1:1.
NO THAT IS WRONG
More...
Ain't that the truth!!
I can't count the times I've read "The odds of the price going up or down are 50/50". That might be true regarding the very next tick. But the true odds are determined by the direction of the TREND in the current time frame.
 
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