I want discuss a simple easy system that started by theoretical statistical discussion.
If price in Forex is pure random and there are two possible outcomes when we define a trade (win /loose) with the same probabilities (50% each), so in the long run if we can have an small edge we can profit if we keep low spread and define proper setup in SL and TP.
Basic assumptions:
Currency with 1,5 spread.
When enter a trade, we can define TP of 30 pips and 20 SL.
Success rate of 50% (lets assume this without any edge; so, no need to try define where the market goes…)
success rate of 50% only holds for equal TP and SL. and if you set them equal you should lose on average the spread per trade (on average, not every trade).
To extend on TopFroxx, if the market is truly random walk, then the probability of a 30 pip move is lower than that of a 20 pip move, so you would end up being stopped out more often than taking a profit such that it would basically balance out to zero expected profit, negative factoring in the spread.
You need to be a bit more in depth and precise here. You need to define an ‘up’ factor and a ‘down’ factor. Also, define the probabilities of each of these. Then, expected values can be calculated, and the random variable (rate) follow a standard normal distribution.
Google ‘binomial tree pricing model’ for more help.
Generally speaking the markets are fairly efficient. As was stated before, altering your target size also alters to probabilities of your TP/SL being hit, so that in general they equalize and the perceived advantage is lost.
However, it is a worthwhile exercise to get out of the theoretical and dump some market data for a few symbols to Excel or the analysis program of your choice. Do an analysis of a particular symbol using a fixed step value. I believe this is what the professor is getting at with his allusion to the binomial tree pricing model. You can then determine the empirical odds of a given move of a given size for each symbol for your sample. Not all symbols have the same odds of movement / the same distributions! You might not find much exploitable here above costs but when I did this exercise it became obvious out of EU and AU which to favor as a trend trader and which to favor to revert to the mean.