Are You Probably Going To Win, Or Are You Probably Going To Lose?

Beginner Questions
1

Take a look at the last two bull candles in this 4-hour chart of U/J. With the information you have here, what’s more probable, price getting to the first blue line before reaching the red line? Or, is it more probable you will get stopped out?

Probability 1
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What did you base your decision on?

The problem is, beginners fixate solely on risk and reward. But I have a secret to share with you that may change the way you trade. The secret that no one ever talks about is this:

There is more to trading than risk and reward. The most imoprtant variable is left out in almost all trading discussions. And that is probability.

To illustrate, I’ll give an example. Going back to the chart above, using the information given, you have at least a 60% chance of hitting the first profit target (first blue line). That’s easy, because it’s a scalp.

But what about the second blue line? That’s a swing profit, and with swing profits you only have about a 40% chance. So what’s my point?

You cannot have a perfect trade where you have low risk, high reward, and high probability. That would be a perfect trade, and they do not exist.

Here are some easy formulas to follow:

Low risk + High reward = Low probability

High risk + Low reward = High probability

A high probability trade would be to enter long on the above chart right at this minute, taking profit at the first blue line.

Most traders would not do that, since the risk is great and the profit is low. But the probability is very high that you will at least make some money. While I’m not advocating for scalping, I am advocating for probability.

Try this on your next trend trade. Let’s say you want to enter a strong bullish trend. Enter on a weak looking bear candle, then put your stop twice as far as you think it should go (you will have to adjust your position size). Your stop should always be at the prior swing level. Take profit at the next major resistance level, even if you get less than 1:2 RR.

The more you focus your attention on high probability trades and less on what you might lose, you will lose less. Strange paradox, huh? :slightly_smiling_face:

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that is a great information for all not only the beginners. Thank you.

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Thanks so much and all the best on the charts :slightly_smiling_face:

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Have you studied Al Brooks?? That is exactly what he says.

Cheers

Blackduck

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I’ve taken both courses. I’ve taken other courses and read countless books. No one else talks about probability. Kinda makes you wonder.

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Yes you are right and I have done his courses as well. He is the best price action trader around.

Cheers

Blackduck

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I like this way of thinking. Its not wrong to go counter-trend. its not wrong to go long at a high or go short at a low. Right now I am usually using bracket trades so that I either set a buy at a high and a sell at a low, or I set an opposing order to whatever position I am taking live.

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Steve, Steve, Steve, where do we start.

First, who am I to knock Al Brooks. A much wiser man than I and few could go wrong practicing his teachings.

And probability is a definite must to understand opportunity when it comes to speculating in the markets.

But if you are going to subscribe to probability, by default you MUST also subscribe to the a finical theory more commonly known as Random Walk Hypothesis. There is a wealth of studies on this, all one needs to do is type the three words into google scholar. I certainly can’t offer anything new on the subject. What I can do is offer my perspective on it.

Now I have gigs of data from dukascopy taking up endless spreadsheets so it is with great confidence I can say IMHO the market is random. Meaning there is a 50% chance that the market will move up 10 pips or down 10 pips. 13 pips, 27 pips, 64 pips, 123, 234 pips and so on.

So you are quite correct in repeating your learnings in stating that there is a 60% chance of the price moving up 40 pips over it retracing down 60. But it also means there still is that 40% chance of that retracement occurring. Therefore, as a random event, for every 100 trades I place, 60 will be winners, 40 will be loser and I would break even. However, in the real world there is a little something know as spread and spread gives the house the edge.

For argument sake lets say this pair has a 2 pip spread. The moment I enter the trade the price now needs to move 42 pips to hit our TP target and only 58 pips before our SL is hit. Again as a random event this now yields 58 winners but 42 losing trades leaving us with a nett loss overall.

It simply does not matter what price action occurred prior to placing that trade. There is no predictive power to give you that magical edge.

Therefore while probability can give you the edge to increase your win ratio, the house edge will always insure that in the long term your balance will slowly be eroded away. The old death by a 1000s cuts.

And then there is commision.

In conclusion, a trader can only beat the market by, at some point, taking on excessive risk. Luckily for us the market is dynamic. The actions of speculators in the derivatives market drive the price as new information is feed into the marketplace. Typically this price discovery occurs firstly in the derivatives markets because transition cost are much lower than the spot market. By leaving your trade open and embracing risk you can take advance of this price movement therefore increasing the expectancy of your “bet” and increasing your balance. The question is but, how long that new information is useful for.

Just a little something you can discuss with the ladies at the gym.

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Which gym is this that is full of forex ladies? Asking for a friend…

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Over a few years of my trading career, I have come to realize that the market is more like a coin. There are only two ways the market moves. Up or Down. Nothing in between. Therefore, the probability of the market moving one way is “one out of the total two” (50%)… I do not think there is any point in time when the market has any other probability of moving one way, other than 50%.
My point is that, anything more or less than 50% is only based on one’s perspective and bias, which can be quite subjective from one trader to the other. The market itself does not know any high or low probability movement to one side or the other. Only traders gather information to based on whatever reasons to come up with those probabilities outside the original 50% offered by the market. This is the reason why two traders can come to differ in trade opinions.
So, IMO, I think the real edge lies in risk and money management practices. Not in the probability, because it is only 50% at all times. Cut those losses short and let the winners run. If the market offers 50% probability for you to be right in your bias, then, why not make the most of it whenever the odds are in your favor?

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Great discussion. Just my opinion here, but I think it oversimplifies to hold beliefs like “the market is nothing but chaos” or “odds are always 50/50”. I get it. I totally agree that currency markets ARE chaotic and unpredictable. There will definitely, without doubt be losses in any trading strategy. IMO due to all the retracement, all the influencing factors, all the volatility, Forex simply trades much differently than the equities people are used to. It deserves its own unique approach and success criteria. I believe that a winning Forex strategy means finding statistically-significant occurrences that will produce enough winners vs. losers, given the strategy’s risk:reward ratio to be profitable over time. I disagree that the only way to win is to swallow all kinds of risk. Find a pattern that happens “often enough” to trade into and do all the good trade management stuff that people have already mentioned. Patterns happen, even in chaotic circumstances. Nothing worthwhile is easy, and nothing easy is worthwhile. Good Luck to all!

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The OP knows :wink:

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Regardless, I’m new. I need to earn trust levels. :laughing:

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The candles alone & single time-frame reduce my probability to determine direction, especially on lower time-frame where stops are easy to hunt for. Having low RR create not only extra stress on the trader to maintain high success rate (which if other trades are taken like this are bound to hit a losing streak) Having low RR makes trading methods fragile and doesn’t allow the trader the ability to “let winners run” and let the market give the trader what is available.

You need BOTH probability AND risk reward to really have a strong, durable and lasting trading system and strategy. Perfect trades do exist but are rare, i had one this year that was a which was 183.5 : 1 RR trade. High probability, low risk, ridiculous reward.

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When you have your chosen pattern, then you go to a higher level. Learn to READ and understand markets and price-action. When you can read that, then align your pattern to that. Or better yet, what i teach is the otherway around: Learn how to read markets and price-action, then find patterns around that. I promise you, your results will transform and take you to levels other traders can only dream of.

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Additional indicators, studies or tools you place on the charts only help to support your bias. They only increase the probability of "you" taking a trade in a certain direction. They do not and never will increase the probability of the “market” moving in that certain direction. The market’s probability of moving in any direction will still be 50% regardless of how many lines or indicators you have on your charts.

A high RRR helps cushion your account during during losing streaks, which are bound to happen even with the so called "High probability trade setups". During such times, that’s when you realize that you (hypothetically) took 5 steps forward, and then took 10 backwards, if your strategy has a low RRR. You might win 10 trade in a row, only to wipe all your returns within 3 losing trades.
183.5:1 RRR :astonished:is just insanely huge. That’s a home run trade that only a few will ever experience in their entire career. That’s what gives a trader the edge. Letting the winners give you what they are willing to give you. Do not cap your upside.

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“Watch the downside, the upside will take care of itself.” - John Paulson

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“Watch the downside, the upside will take care of itself.” - John Paulson

I would modify that that the upside takes care of itself up to a designated profit target, and then with assistance from a trailing loss, to ensure that there isn’t a downside to watch.

IMO, it’s just as important to realise that trends change direction.

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Thanks for this information

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That’s outstanding information. But is it not counter trading? Too risky for newbies!