Is 75% of successful forecasts on close price enough for profitable trading?

Discussion in 'Strategy Development' started by gon, Dec 10, 2017.

  1. gon



    I have been developing systems to forecast next day price changes on financial instruments such as forex pairs, stocks, indexes, commodities and so on.

    Since I have not developed a detailed strategy, I have a question maybe somebody might be able to answer.

    If you could predict successfully 75% of the times if next day's close price was going to be above or below current day's close price; could you make a profitable strategy?

    Would it be enough? If not, which level of accuracy would you need for it?
  2. monee


    Sounds like it would be good for spreads.
  3. Xela


    Welcome to ET.

    In terms of general trading, the entire question isn't quite appropriate, because (I strongly suspect) the thinking/belief-set from which it was formulated is actually a slightly misguided one.

    The reality is that there isn't a quantified "level of accuracy" for directional price-movements that determines whether or not a profitable method can be derived from something. There's a lot more to it than just that. There can easily be systems with 75% directional accuracy that steadily lose money, and there can easily be systems with only 25% directional accuracy that steadily make profits.

    What matter is overall expectancy, not win-rate.

    You need to gain more from your collective wins than you lose from your collective losses.

    Key concept: whether or not you can actually do this steadily tends to have a lot more to do with trade management and risk management than it does with "how often you can get the direction right".

    Would a short list of introductory trading books that explain all this stuff be helpful to you?
    Cat88, i960, MACD and 2 others like this.
  4. toc


    50-60% win rate, 2:1 reward to risk ratio, low drawdowns on equity curve, fewer trades if possible like 5-8 per month, 20%+ a year returns................and you are in an elite bracket already.

    Seems yours is very good on win rate, more numbers would be welcome.
    comagnum and gon like this.
  5. Not enough.

    75% prediction has little to do with your actual win rate if you use stops. If you don't you will likely blow your account beyond recovery. If you do, too small and it will hurt your win rate, too big and you will have bad r:r.

    Accuracy of prediction is not enough. If you asked this question without addressing any of the above, then definitely not. Build on the missing parts.
    Van_der_Voort_4, gon and Xela like this.
  6. DTB2


    Many good answers in this thread.
  7. gon


    Thank you for your answers.

    I do not have a trading system, but a system to forecast whether prices will go either up or down for a given timeframe.

    These algorithms may be improved but before doing it, I wonder if an experienced trader would find it useful to develop a trading system knowing that the average rate of right predicted movements is for instance 75% for next day close and let's say 87% for next open.

    So, the issue is not about trading strategy, but about comparing that ratio with the ratio of successful predictions required to be profitable by the strategies you know may require similar information.

    Knowing this I know if it is worth starting to work on some applications for these predictions or if it would be better to improve the accuracy.

    I am not a experienced trader, so I do not have the data required to answer my doubt.

    kind regards.
  8. DTB2


    Now, just determine how wrong the other 25% of trades are.

    Since you are not an experienced trader, please take this the right way. Anyone can have a 95% correct prediction of where price will go. And lose BIG $$

    Tomorrow price will go up at least 1 tick. 95% chance I'm right. It may go down 50 ticks first or if it doesn't come back it may go down 100 ticks by end of day.

    You need to know the path a price takes before it gets to your final predicted destination.
    gon likes this.
  9. Xela


    As explained just above, there simply isn't a "required ratio of directional predicitions for profitability", because the proportion of correct directional predictions is only a very minor part in the potential construction of a profitable trading method from a directional prediction-system.

    Apologies indeed if I sound critical, but the question you're asking is itself predicated on a slightly misguided and mistaken (albeit perfectly intuitive and superfically entirely reasonable) assumption.

    We have all been there: none of us was born with an understanding of these often counterintuitive and tricky subjects.

    But, respectfully, repeating your question really won't increase its validity or make it any more answerable within the frame of reference you seek, because that isn't actually an appropriate frame of reference in the first place; sorry! [​IMG]

    Would a short list of introductory trading books that explain all this stuff be helpful to you?
    Sprout, MACD, comagnum and 1 other person like this.
  10. DTB2


    #10     Dec 10, 2017
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