just a curious question.. why is it that it seems as a trader with no knowledge of trading has less than a 50% chance of being right? when one can only go long or short why does it seem that one needs an edge just to have a 50% success rate?
Success rate means very little in this business. You can be right 95% of the time and still lose money. You can be right only 20% of the time and make a lot of money. The key is not just the success rate but the combination of success rate and avg. win to avg. loss ratio. These parameters together determine the profit factor as it is shown in this excellent paper by Michael Harris: http://www.tradingpatterns.com/profitability.pdf Ron
im just saying in a case where it would seem that you only have two choices... it seems you have a probability of less than 1:2 without an edge
Because you could take any setup, go long or short on the trade, and because of the random element of the market, lose on both trades even though one trade or the other would have proven profitable given enough time. Because of the noise of the market a flip of a coin event can still create a loss.
Try an experiment. Paper-trade some chart with <i>true</i> randomness, and do it many many times. Ignore slippage and commissions. If you can program, do it by generating random numbers. And then see if, with a large sample, you end up with an expectation of breaking even. You should. If you do, then it would have to be that the effect is psychological.
I didn't say that: I said that was a <i>theory</i>, but you couldn't say that until you did the experiment.
Also, keep in mind slippage and commissions. I said to leave those out of the experiment, just for the sake of all other factors being equal, but they would be there in real life.
Depending on how you look at it, there is some truth in your words. Trader or not, in a simple coin toss with only two outcomes the odds are already stacked against you. Assume you are compounding with a dollar bet and the possible outcomes are: -1,-1 1,-1 -1,1 1,1 What is the probability that you will get a successful return off just these 2 tosses? It's not 50% as most would presume. It's pretty mind blowing when you 1st encounter it. Note that net expectation over many trials is a different beast; but it requires that you make it to those many trials first.