there are many misunderstandings regarding the 'flip coin' way. Markets are fractals, this means they go in both directions all the time. there is NO MARKET DIRECTION. this does not exist. To be able to tell a direction you must specify a TIME FRAME. Therefore, a flip coin strategy MUST specify time frame (a limit in time) to be either right or wrong. Then, you are only a third of the way. Because what makes a flip coin strategy work is money management, risk control and reward versus risk (which I see as 3 different aspects!). a flip coin strategy DOES WORK. the problem is trader do not understand how it works. several market wiz are successful (at least for a while) with a 30% win ratio. So a basic flip coin strategy is better at 50% win ratio. trouble is the money part is the most important and must be prepared carefully. in fact that becomes the system (not the entry!). let me tell you this, many systems and software trading against you and making money are doing so with randomlike entries. sure we say it is a powerful analysis fractal or velocity or whatever to feel good (or sell it). but the truth is, these systems are only aimed at generating random entries, just trying to get close to 50% win ratio. the money is made on the trade management. And because most traders are not familiar or simply do not really understand the principle, 70-80% loose. don't be offended, it is a long journey. I have been there, trying to break out and be always on the wrong side not understanding why. in fact ALL the answers you are looking for are in this board. some answers are in masterbooks also mentioned on this site. The difficult part is to really get what the authors meant. And maybe there is only one way : trade, loose, keep losses small enough so you can stay in the game until you understand it. neo
Cesko, Can you logically explain to me where is the error?? From my example, since a monkey pounding on a typewriter will either type a novel or he won't, does that mean it's a 50% chance that he will? A 50% chance that he won't?
Well, guess what, I'm a monkey and random pounding is exactly how I produced my 30 posts. What are you gonna say now? (Hint to other monkeys: use the spell checker.) voodoo
It's impossible to win with random-entry system. But it's possible to win with 50% or less of successful trades with positive average profit/loss ratio, for example 3:1. If average profit from a trade is 3x higher than an average loss ( 3:1 ratio ), than at least 25% of your trades must be profitable in order to win. It must be a little bit more, because of commissions. Random-entry system won't make it. It will make 25%. So the result will be zero minus commissions! I'm maybe wrong, I've tested this with excel with random prices. See attached xls file. The question is, Does the stock or futures prices move randomly or not? DT-waw
Has anyone actually developed the ideal profit to loss ratio based on how the market operates? How was 3:1 profit to loss ratio chosen instead of say 4:1 profit to loss with 20% win rate, or even a 1:3 profit to loss ratio with 75% win? I suspect that I lot of disciplined traders use stops to protect downside losses, but end up lossing in the long run, just because the profit/loss ratio is out of balance with the win rate? I have not yet come up with the magic combination of profit/loss ratio and win rate, but maybe some other experienced traders have. Or maybe it is different with every stock....
well, what is a win? what is a loss? when we say 50/50 is random do we assume that amount of win = amount of loss? Would it be prudent to assume that the probability of 1X loss is same as probability of 3X gain? Probably not. But nevertheless that's the manner in which wins and losses are defined in most systems ie. a win is greater than a loss by some factor. Just something to ponder.