50% ?

Discussion in 'Strategy Development' started by traitor786, Mar 7, 2013.

  1. So i have heard this over and over and would like to clarify the issue.

    It is said that one who trades blindly has a 50% chance of their trade being in the money. To succeed one would need a 10% advantage, (or have risk to reward ratios that are equivilant)

    If I have a profit target of 100 points and a stop of 50 points it is not a 50 50 chance I will have profit. it is much more likely that my 50 point stop gets hit.

    Think about a 1000 point target and a 10 point stop. there is no 50 50 here or we would all be rich.

    As one tries to get better ratios it becomes harder to win and one accumulates more losses. The amazing thing is that it SEEMS that no matter how you play with the numbers there is no edge.

    I am wondering if any one knows any of the math behind this. Is it linear ?
     
  2. asap

    asap

    the math is very simple.

    if the profit target is 100 and the stop loss 50, then the chances of the PT being hit are about half of the SL being hit.

    hence, the expectancy of such trading system would be as follows:

    33,33%p * 100 PT - 66,66%p * 50p SL == 0 - commissions and slippage.


    in trading there's no free lunch.

    the edge has to be derived from somewhere else, say arbitrage, inside info, industry knowledge, or in the vast majority of cases mere luck.

    in sum, life's a biatch and trading is the mother of them all.
     
  3. Not too sure where the 33,33 % came from, (maybe its from a 1 to 3 ratio), But the idea Is that there is no edge as the more you increase the ratio of SL and TP , the less the win % goes.

    You are suggesting that this is a perfectly linear relation where the sum of the two vectors is always zero. Maybe is it not that exact ( I hope)

    Basically what this means is that we are saying the whole win% and SL ratio are being thrown out the door ? This would be contrary to 95% of the posts here!
     
  4. I don't care how you do it, but in some way you need to treat your losses differently than you treat your winners

    otherwise, you always end up 50/50

    and over time the spread and commmish gets you

    and that means position sizing

    before you ever start, you need the capitalization to put on larger and smaller size positions

    nobody is so good they can make it bracket trading

    yet you see them on tv all the time

    "put it on here with a stop and a target"

    usually 2 or 3 to 1

    That's a great way to go broke slowly

    they believe their setup will save them

    position sizing is not the be all end all, but if you are running flat out your first trade, it's hard to dig yourself out of a hole with half the size
     
  5. How can luck give consistent ? The act of covering the cost of fees is not an easy one. (This is where the casino out wins its clients) being able to cover such fees over a long term means that the trader has an advantage, though small it is consistent.

    Is TA an edge ? Gold is at a support level that we have bounce off of 3 times since the high. Though no one knows its direction, the odds that if it bounces it will go up does not seem to have linear risk as price goes up.

    That is to say that most the risk seems to be near support levels. once those levels are clear, The risk does not seem to be increase at the same rate that price does.
     
  6. by the way, this won't work at the craps table

    but some of the money management principles will

    I suppose you could do it with constant size, but it's a rough way to go

    the odds against you trading are much more severe than what you can get in Las Vegas

    but when it starts trending, it makes dice look like a simpleton's game

    I don't care if you are scalping, or swinging or position trading, all the money is made on the trend (if you don't get chopped to death first.)
     
  7. dom993

    dom993

    I think you are paying way too much attention to the current trade. It shouldn't matter the least whether it is a win or a loss.

    What does matter, is that it is part of a trading "system" with a verified (by you!) edge, and that you take all the trades corresponding to that system without hesitation, exception or deviation. After 100 trades, you'll be ahead most likely. But any particular trade, as long as it matches the system's rule, is both a candidate for a win and a candidate for a loss. So stop torturing yourself by trying to outsmart the market, and cherry-pick the best looking setup which most of the time trap the crowd.
     
  8. yeah, I'm just kind of rambling tonight. I'm not really thinking clearly. Still kind of shell shocked from Friday's action, plus it has been just a horrible week. So I am kind of talking to myself trying to reaffirm what I know. Thanks for the encouragement. I'll see where I am in 100 trades. Can't be any worse than my last 100 trades.

    at any rate, all the money is in the trend

    if you don't believe me, just get on the wrong side of it one time
     
  9. If we agree that having a 1:10 ratio of stop to take profit will lead in a 90% chance of failure, then we are saying that the math evens out and ratios make no difference. I think this is a hard thing to say for many.

    But now we are saying that position size makes a difference ? I assume we all know that the less we put in the less we get.

    I cant see why limiting my profit at times can help.

    The only way to make sense of this is that at times the market is on a run or a trend and that is when we increase our size.

    Then it is not on a run and we have no advantage so we lower our investment because we are unable to stay on the side lines.

    Maybe Im missing something, but lowering ones bet means that ones system does not generate consistent profits.

    Also, to say that money can be made on trends seems very much like saying that 6 heads came out in a row so we should bet heads.
     
  10. oh sorry, you talkin to me?
     
    #10     Mar 8, 2013