“balance of probability” has to do with with standards for proof in a court of law. It is legal terminology and has nothing to do with trading.
Trading is more about assessing probabilities as opposed to assessing certainties. Interestingly, uncertainty is what gives us those asymmetric opportunities (alluded to by Xela) that can be very profitable. Hence we should embrace uncertainty and not focus on creating certainty (which we cannot, even if we work hard at it). The markets by nature are uncertain. But that uncertainty is precisely why they are profitable. Nevertheless, there are moments of clarity when the market tips it’s hand and where the probabilities increase in favor of making money. And all of this takes place in an environment of uncertainty. One has to develop an “eye” for spottings these moments of clarity. Many times they are counter-intuitive. And one has to develop the courage to act in the moment. Too many traders try to create certainty by over-confirmation and they cannot “see the forest for the trees.”
I agree that the odds may improve, and that is the point of trading -- looking for improved odds. But you will never be able to enumerate those odds with anything approaching precision. And that is what distinguishes uncertainty from probability. Genuine probability allows you to enumerate those odds. If think you can enumerate the odds of a successful trade with meaningful precision, then you are at sea. "Balance of probability" is a useful construct to avoid placing too much emphasis on accuracy when it comes to market behavior.
Well, it is ... but it can also sometimes be a less-than-optimal or even misguided term, in that it can mislead less experienced traders into imagining that they should always be looking for trade entries which have a greater than 50% chance of leading to a winning trade, ignoring the reality that lower win-rate methods (with higher R:R, obviously) may be (and often are) a better approach for them. The discussion about "uncertainty" and "probability" is not only a slightly semantic one (and therefore particularly prone to misunderstandings and to talking at cross purposes) but also to some extent what a logician would call a "category error". I'm "just saying" ...
That's a fair comment. And while I personally look for trades that I think have a better than even chance of succeeding, I realize that's not the way everyone plays it. Even so, I would think that the "balance of probability" would be used in a R:R context, in that I don't think most people identify and choose a trade that they think in advance will underperform. I do agree that we are getting into semantics somewhat. But I also think some people use terms a bit too loosely.
The market gravitates towards uncertainty. Uncertainty is 50/50. That means it has a 50% chance of going up x distance as a 50% chance of going down the same distance. The directional probability of an equal move is 50/50 most of the session and on most of the bars. This 50/50 are where bulls and bears feel there is value. However, the market will probe after staying for a while in this 50/50 area. Bulls want a BO north. Bears will probe for a BO south. One side will win. The other will give up...momentarily. For a bit. These brief times of a successful probe, in either direction, are when the directional probability increases to 60% to 70%. Notice I said successful probe, not a bull or bear trap. There are rare occasions, and very short moments, when directional probability is 80%. These times when directional probability increases above 50% cannot last long as the market will gravitate back to 50/50 usually at some resistance or support level or measured move level. What most traders fail to understand is that most probes fail. They become bull and bear traps. The market has inertia and tends to keep doing what it is doing. Eventually a BO will succeed. However, aprox 80% of BO attempts fail. Hence traders get whip-sawed. A trader should understand what constitutes a successful B.O. Institutions cannot hide what they are doing. The chart shows what they are doing.
No it's not. Uncertainty is uncertain. If it were 50/50, then the probability would be known and that would be its distribution.
The market operates in a 40 to 60 band. Some traders prefer taking trades on the 60 end as probabilty increases but reward is smaller and risk is greater. This is my preference. But I am a 1 to 4 point scalper in the ES. Other traders prefer to trade on the 40 end. Risk is smaller (if trade is unsuccessful) as stoploss is tighter and reward is bigger (if successful) but probability is smaller (the trade will fail more than it succeeds). Hence these traders will lose more often than they win but their wins make up for their losses. i think Xela punctuated this point??