Data Mining: Day Two - The Revelation of Probability
I'm afraid i'm altering my management once again. But I promise its for good reason and it will improve your profitability. If you don't feel like lynching me after this I really think you'll make a lot more money!
As many of you know, I used to trade the e-mini's in the Russell 2000 and S&P 500. Their price action is very different from that of Forex. Yea, they all make swings and measured pullbacks, but how those swings play out happen in two very different ways. The indices's like to move and if they go they go. No stops they are straight up to swing highs or the -38.2% without two much of a fuss. And that happens a fair amount of the time. Enough to try and hold for the big runners as I have advocated in this thread. However, the forex markets act much differently.
I've found over the past month of familiarizing myself with these markets that they will make nice swings, but commonly fail after a nice bit of profit only to retest the level you originally got in at and continue on, or not. But I think anyone who has looked at applying this method to the markets can agree with me that it really is not that high odds that each swing will go onto take out the -38.2% extension. Don't get me wrong-it does happen, but according to my data only roughly 1 out of 10 or 15 trades will fully play out that way. And when it does - you're rolling in the dough right? Right. But what if we gave up that 1 in 15 chance for big money to make slightly less big money 8 out of 10 times? Would we make more? Actually... YES.
Don't believe me? Go check your trade journals and retest the outcomes of your management if you took profit at the 23.6% level EACH time. (You ARE all journaling right?
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I did that analysis on the trades i've taken this month. Result?
I would've been not 1, not 2, but over 3 TIMES MORE PROFITABLE!!! (Actually 3.3x's but who's counting eh?).
Just look at the swings - they speak for themselves. How many go up and hit the 23.6 without too much of a fuss? A hell of a lot. How many quit there? Quite a few. Compare that to how many actually go for a big runner. See what i'm getting at?
Were playing the odds here boys. We've got an edge and part of that edge is understanding what the HIGHEST PROBABILITY outcome of each trade is going to be. I feel that that outcome is the 23.6% price level being hit. And just as importantly it also means that it is a risk of 1 and a reward of 1.5 on each trade we take (Risk: 87%-62% = 25%, Reward: 62%-24% = 38%, ie. 38%/25% = 1.52). I like those odds. That means I only have to be right about my trades less than 50% of the time and I still make money. I like those odds!
Look... either way you will make money. But I feel you will be making much more money by siding with the probabilities here; and they say the same thing... 23.6% is much more probable than -38.2%.
The results from this months entries using the old method of holding for gold: 114 Pips.
The results taking profit at 23.6% on each trade: 372 Pips.
The average trade win went 19 pips to 62 pips!
But don't take my word for it. Tell me what it would've changed on your setups - i'm honestly very curious. But I think you'll be impressed with the change.
Hope this helps folks... Cheers!