According to probability theory, a situation will eventually take the position of which ever side is more probable. Like the way a casino is guaranteed to make a long-term profit because they have like a 2% edge over the public. In other words, what ever is likely to happen, will happen, eventually. I was trying to apply this idea to Forex trading and I was thinking, if you use even the most basic trading system, your chances of making a winning trade are higher (even just slightly) than your chances of making a losing trade which ensures long-term success. I know many people will argue that this is all just theory, but what you have to realize is that this is the very business model which allows casinos to bring in millions in profit annually. It’s not just theory, it’s applied, observed and confirmed theory. So it seems that with proper money management, discipline and a simple, half-decent trading system, you should be able to guarantee long term profits. This seems, well, a little too easy. Am I missing something here?
Yes you are.
If you remove the spread most systems will actually over the very long term turn out 50/50, that is no better or worse than chance.
When you include the spread cost (your broker’s/casino’s 2%) most systems lose money over time.
However, if you can find a system or method of trading that delivers a long term profit factor above 1.0, then your good to go.
Yes, you are missing something. Human fear and greed. 
Your logic is sound. All you need is a small edge and you’ll make money in the long-run, but people are emotional and screw it up. That’s why 95% of the people trading lose money.
Yep, more experieced traders already know this. It’s called an, “edge,” just like in the casinos.
Thats why traders refer to their “win/loss,” ratio and, “risk/reward,” ratio.
If you’ve learned a method or developed it or whatever, the next step is to trade it on demo and then live with small amounts until you have traded a sufficient sample size and executed your method correctly every time.
What’s suffiecient? IMO, at least 20 trades. 100 trades being more acceptable if you really want to prove your edges numbers to yourself.
So, if I win 8 out of 10 times on average and have a 1:1 ratio I know my edge, my odds and the overall probability and can trade accordingly.
The best edges will have a high win rate AND a high reward to risk ratio.
Pretty cool that all three of us posted on exactly the same minute!
I agree with you, but if you did have a system that had just a slight edge (say 51% wins, including the spread) then you would make money in the long-run.
The problem is that most people can’t or won’t think that far ahead. They want to be millionaires NOW, not in 10-20 years, so they go for big wins and end up losing it all.
So when it comes right down to it, [B]Discipline[/B], is the single most important factor, am I right?
Absolutely. Patience is the hardest part in trading it seems.
I read a post somewhere from a guy who said something worth thinking about. He said something like: if I lose a trade I don’t allow myself to complain or get upset about it. I just calmly state that I followed my plan. If I win I don’t congratulate myself, I just say to myself: I followed my plan.
When we get to that state of having emotional control, that’s when we have what it takes to make it. That’s when we can calmly sit back and let the 51% wins make us rich slowly.
That’s the holy grail if there is one. Inside every traders mind.
In one word, yes.
LOL, doesn’t say much for our Friday social schedule.
one advantage casinos have is thousands of transactions (bets) per day. Even with a small percentage like around 1% at blackjack, 2.5% at roulette, it all adds up !
That’s a good point, but none the less you could still apply the same basic principles to Forex and have a good chance at success.
The calculation is totally wrong. We must consider Risk/Reward Ratio too.
For example: Let’s say winning rate is 60%, which means in long run, every 10 trades will have 6 winning trades and 4 losing trades.
Based on the above assumption, and if Risk/Reward Ratio is 1:2 (SL:TP=1:2), then you win FOUR TP pips for every 10 trades in the long run (6xTP-4xSL= 6xTP-4x(TP/2)=4TP).
However, if Risk/Reward Ratio is 1:1 (SL:TP=1:1), then you win ONE TP pips for every 10 trades in the long run.
And, if Risk/Reward Ratio is 2:1 (SL:TP=2:1), then you LOSE TWO TP pips for every 10 trades in the long run (6xTP-4xSL= 6xTP-4x(2xTP)=-2TP).
As I know, for many EAs, SL is bigger than TP, so if winning rate is only 60%, you definitely will lose.
For generic calculation, let assume winning rate is A, and Risk Ratio is B, then we know SL:TP=B, or SL=BxTP, so for every n trades, we will have nxA winning trades, and nx(1-A) losing trades, the profit is calculated as follows:
Profit for n trades (in pips)=nxAxTP - nx(1-A)xSL
=nxAxTP - nx(1-A)xBxTP
=(A - (1-A)xB)xnxTP
So, in the long run, if A>(1-A)xB, you will win, otherwise, you will lose.What calculation would that be? I can’t see any in my post. Also, I said nothing about Risk:Reward.
there are no wrong calculations, only wrong assumptions that all traders use EA’s with larger stops than take profits when in reality most SUCCESSFUL traders do NOT use EA’s and generally have larger TP’s than SL’s
lee
Also with any system that you only have a slight edge with lets say 60%
If we trade this system 100 times then in theory we should win 60 times right.
But how many losers in a row will we have??? At only 2% a trade, lets say you lose 10 times in a row( it will happen!!). How many trades do we have to win just to make those 10 loses up?? Its more then 10. Me personally I would never think about trading some thing unless it has at least a 85% chance of turning a profit. You can invest in a lot of other things that have a higher chance then 60%…House flipping, ect ect ect
Great post!
I agree that a simple system with positive expectancy, including spread/slipage, applied consistently is the way to go.
Sticking to that system… now that’s the true holy grail, for the reasons mentioned by the other posters.
Backtesting can help give one the confidence in one’s system that will be required when the inevitable drawdown occurs.
before that you need to find or discover something that actually works. If a system has a negative expectancy no amount of discipline or money management in the world will help