odds and probability

Discussion in 'Trading' started by Gordon Gekko, Sep 28, 2002.

  1. i'm sure i'm not the only one here who gets confused by this stuff...


    Date: 02/06/97 at 15:44:00
    From: Anonymous
    Subject: Odds and probability

    What is the difference between odds and probability? Or is odds a slang term for probability?


    Date: 02/06/97 at 21:41:26
    From: Doctor Wallace
    Subject: Re: Odds and probability

    No, odds is not slang for probability. There is a difference.

    A probability is a number from 0 to 1 inclusive, usually expressed as a fraction, which is the ratio of the number of chances of a specific event to the total number of chances possible.

    For example, if I have 4 marbles in a jar, 3 red and 1 blue, then the probability of drawing the blue is 1/4. There is one chance of a blue marble and 4 total chances (marbles).

    Odds are expressed as the number of chances for (or against) versus the number of chances against (or for). So, since there is 1 chance of your picking the blue, and 3 chances of your picking red, the odds are 3 to 1 AGAINST you picking the blue. For odds in favor, we just reverse them. The odds are 1 to 3 IN FAVOR OF you picking the blue.

    This can be a little confusing, so I'll say it again. If you express
    odds as AGAINST, you put the number of chances against first, versus the number of chances for. If you express odds as IN FAVOR OF, you put the chances for the event happening first.

    Note that this does NOT mean that the probability is 1/3 for or
    against in the above example.

    To convert odds to probability, we have to ADD the chances. So, if the odds against a horse winning are 4 to 1, this means that, out of 5 (4 + 1) chances, the horse has 1 chance of winning. So the PROBABILITY of the horse winning is 1/5 or 20 percent.

    I hope this helps. If you need more assistance, don't hesitate to
    write back!

    -Doctor Wallace, The Math Forum
  2. Don't worry about it.:) Seriously G.G. you are over analyzing this business.
  3. GG has taken over this board every third post i open is his.

    ...someone start a new poll :)
  4. I have competition!
  5. That's about as clear an explanation as you can get, and for most traders I would think it's a pretty simple concept to grasp.
  6. i wasn't saying the explanation is not clear. i posted it because it IS clear. until i read that, i didn't really understand this stuff...so i posted it to help others. i'm not looking to debate it or anything.
  7. i'm determined and persistent
  8. that may be true, but why are so few people making a lot of money? and why are so many losing? i'm trying to find out. wouldn't you like to know how the best traders are doing it?
  9. That may be like asking why everyone isn't making a killing by being an actress, singer, CEO, etc.

    The simple fact is that a lot of people simply can't do it. The biggest reason is most likely due to emotional / psychological ones and less so because of a poor system.

    If everyone was successful at trading, then nobody would bother since the rewards would be far less for those who eventually do master it.

    That's just my take on it. Then again -- what do I know!

    ET's Whipping Child
  10. Gee, GG...
    That question has a simple answer... (a) trading well is difficult, and (b) traders do not use adequate discipline... about entries, about stops.

    I wouldn't try to tell anyone how to trade as I have knowledge of only what I do. In general, however, I think many traders are floundering because their approach is flawed. I think a trading method should include 3 critical elements:
    On "routine" trades
    a. Profit expectation/risk, on average, of 2:1 or greater
    b. 60% or greater probability of win
    c. On "Big Set-Up" trades, lower probability is expected, but much greater profit expectation.

    In one of my former lives, I was a professional bowler. Of course I was in the bowling alley all the time, and there were always 1 or 2 bowlers who "practiced all the time". You'd think that would make them good. But unless they were practicing GOOD technique, all the practice in the world wouldn't make them good... and of course, it never did. I think many traders are practicing poor technique and will never be any good until they change.

    Scalpers have a tough road. They need lots of winners vs losers because the profits are relatively small compared to expenses. While some go for 10-50 trades in a day (and more), I find an average of 2-5 tradable setups a day for "noise" trades. Some days only 1, some choppy and volatile days, perhaps 8.

    I read of traders trying to scalp "dimes", or report as success a "$.50 winner". After expenses, that's "fishin' in a dry hole" in my book. :D
    #10     Sep 28, 2002