Mathematical probability of 10 losses in a row in scenario 1, not taking into account psychology, emotions, etc.
1/2^10 = 1 in 1024. With proper money management, only .1% of the time will you lose 10 times in a row - so, if you’re making 10 trades a day, once ever 3 years. This isn’t necessarily bad, mathematically. Although the probability of 10 losses in a row occurring is probably much greater when you factor in psychological factors.
Mathematical probability of 10 losses in a row in scenario 2:
2/100^10, or effectively 0. Really, really small, at the very least. Again, probably higher if you factor in the psychological factors, but still way, WAY lower than scenario 1.
Possibly because of my background in finance I am biased, but the idea of Scenario 2 appeals to me. Small losses, consistent growth - very low risk trades.
Also ,as people have said above, you can increase the leverage on your trades to ensure profits. I’d definitely go with scenario 2.
My thought would be, does the system allow for sufficient trading opportunities? In other words depending on the time frame, how many opportunities to place a trade will there be?
The question posed in post #1191 again, to some extent, depends upon trading opportunity, if you are concerned about getting the absolute maximum return.
But apart from the mathematics, I strongly favour number 2. Having small consistent wins, with little draw down is preferable – especially if it has greater trading opportunity; where it could actually be more profitable.
Finally a big thank you Tymen for all your work and effort
I’ve already admitted my ignorance on how to put all that together but it may be that Tymen has already given us a clue to part of the answer in that post he did with the simplified “blue and red” look at price action back on an earlier post (#1917?). It suggests to me that we might be trading more frequently…we’ll see…
And, I see that several folks have posted their answer to the “which trading method?” in terms of Expectancy Analysis. I’m still bothered by that because it does not take into account the question of position sizing - only absolute dollar amounts.
Oh, well…I’ve been wrong before. I remember back in '47…never mind…
As others have mentioned, the total profit over the course of 100 trades would seem to favor Option 1. But I think the question really comes down to reliability. If you can be certain the risk:reward ratio is really 10 to 1 than that would be amazing; likewise if you can give me a trading strategy that wins 98% of the time that would be worth untold riches.
I would have to side with those choosing Option 2. The idea of lots of wins is good for one’s frame of mind when trading - I can assure you I’ve never enjoyed even a 68% win percentage, let alone something as astonishing as 98%. And if you could get me a 90+% win rate I would employ the one wild card perhaps no one has really mentioned yet: the use of the high leverages available in forex to trade absolutely [I]insane[/I] lot sizes using Method 2.
Well it would be #2 for me.
Through the miracle of compounding on 2%, all you need is time.
But the confidence of being right 98% of the time…PRICELESS.
I believe strongly in the 2% money management rule. Since both cases have 10 pip stop losses, I wouldn’t be willing to leverage option 2 to the point where it would be as profitable as option 1.
Option 2 is more consistent than Option 1 by leaps and bounds. While I am tempted to trade it using “insane” (as described by a previous trade) lot sizes, wouldn’t this contradict conventional conservative money management rules?
Lot for lot though, with deep pockets and an equal number of trades and lot sizes, Option 1 is the more profitable of the two options.
However as tymen1 has stated that he will be introducing a revolutionary trading concept, could he be leaning towards circumventing orthodox money management?
You raise an interesting point. I’m guessing that the 2% rule might be predicated on much more “realistic” win/loss ratios. If we could, indeed, greatly exceed “conventional win rates” ( whatever they might be) we might very well be able to stray from “conventional conservative money management rules.”
Once again, I admit to limited knowledge and certainly to not having a really good idea of precisely how any of those terms I put in quotations might be defined.
I think Tymen may have given a clue as to the answer with the diagram with an uptrend with retracements shown in another colour.
I haven’t studied stats for well…a very long time, but I know it’s important to know if trading is to be taken seriously. If the 2 options were mutually exclusive, then according to the risk reward calcs, option one is 3 times better,
The expected outcome of [B]option 1 is 45pips [/B]for a trade and that expected for [B]option 2 is 14.9 pips[/B]. This is calculated as shown for option one below,
Gain: 1000.5 = 50
Loss: -100.5=-5
50-5 =45pips expected outcome for a trade. (same principle used to calc for option 2)
However if the 2 options are not mutually exclusive, then trade option 1 with the trend direction as the pip gains are expected to be bigger as these are with trend. However trade option 2 with the retracements as the countertrend runs by definition will not be as large as the with trend runs.
strictly mathematicaly, not based on time, for make 100 pips you need 6.66 more time than for made 15 pips, interesting too ! the difference between the 2 technic change, my 2 cents !
In response to your question it really comes down to what type of trader you are. If you are starting off in the forex world and would like to make some consistent profitable trades then option 2 might be the best way to go. However as we have seen quite clearly option 1 is mathematically the most profitable in the long term. How about using option 2 to build up your account and then employ option 1 when your account is sizable enough to handle the greater win loss ratio.
Or
Use option 1 for trading retracements (more risky less pips) and option 2 for trading the main trend (less risky and more pips).
thanks again Mr Wortell for all the effort
The answer to Tymen’s question isn’t as simple as you may think.
I wonder if the answer that he wants to see is:
A. It depends on the trader.
As mentioned above though, some traders are happy and comfortable with small, reliable gains and very few losses. Other traders are your all or nothing traders who want to shoot for the moon on every trade and grow their account aggressively but sustain very regular knocks along the way and maybe a wretched losing streak at some juncture.
Looking at the answer from a purely mathematical persepctive doesn’t provide “THE” answer.
However, as this question was about a SINGLE trade, I would go for option 2. Option two is very likely to give you some return on your risk. Option one is a toss of a coin and may leave you with an empty basket or one that is overflowing. The future, though, is too uncertain to bet your shirt on. On a single trade, option 2 every day of the week!
By George, you’re right: the question does seem to have been phrased in terms of a single trade (i.e. …which trade would you choose and why…). Most of us seem to be responding in terms of using the two schemes on a long term basis.
As to what Tymen “wants to see”… I think he put the question out there to get exactly what he (and we) are getting: discussion and reflection on the issue.
I’m cheating…I’ve emailed one of my grandsons to give me some help. He is just finishing his Masters in math with a major in Statistics. I’ll post whatever I learn from him when and If he gets some time to respond.
)