Trading using the law of averages to discover a rule for expectations

Beginner Questions
21

Elroch
Anyone who has a clue about this knows that what matters when trading is the distribution of wins and losses. There is mathematically a probability distribution of results with various positive and negative values. The fraction of wins and losses is only part of this, the size of the wins and losses is equally important.

Read more: 301 Moved Permanently

Elroch: you haven’t read what I have written so I’m going to have to ignore this sorry just because there is a word newbie beside my username doesn’t mean I don’t know what I am speaking about. I repeated myself a few times as people replied so it is there quite plainly written. The average size of wins is one of the 2 things I am fishing for though this post. the other is the frequency of losses (I’m not looking for the size of those losses on average but the frequency at this point). When I say the frequency I mean: is it as low as 1 in every 4; that means are there 3 wins for every loss? Is it that frequent. What I have discovered so far is that it is and also that if it is as frequent as one in three then there is a real problem. Seeing as there are many people making out of forex trading I can only conclude that it is definitely better than 1 in 3 but for an inexperienced trader it may be that it is not more than 1 in 4 trades that are losses and if it is one in three then it has be that the size of the wins are above 50% on top of the size of the trade. There is a lot of variables to consider but any increase ( on the positive side ) in any of those variables will have a big impact on the size of the profit made and add to that 50% but anything below 50% (increase to the negative side, a decrease in profit is a problem using figures from the lowest possible amount that makes this work).

Yes the actual size of the loss is an important variable but if like my friend experienced you loose your internet link at the wrong time then there is a problem. This isn’t rocket science its common sense. I know what I want and its the statistics I am asking about here. Yes the size of the loss counts but only if you get the stop on or whatever risk strategy you use. I need the statistic not a remark about my specific mentality please maybe you should read more carefully yourself take a chill-pill something. I just need that stats but am able to go on with what I got out of my analyses over the last 2 weeks working about 15 hours per day. I just want exact figures solid averages and not figures taken from worst case scenario’s.

Anyway have a great day and good trading to you…

22

I was referring to Indiana Jones and the Last Crusade, you twit.

There, now I was rude.

And again I will tell you that it is your lack of knowledge that is causing your confusion and frustration.

Decide your risk first. Decide your trading methodology. Then you can extract data from that pool.

23

I was referring to Indiana Jones and the Last Crusade, you twit.

There, now I was rude.

And again I will tell you that it is your lack of knowledge that is causing your confusion and frustration.

Decide your risk first. Decide your trading methodology. Then you can extract data from that pool.

Read more: 301 Moved Permanently

yes now there are a lot of things that I could say here…

could you please take a chill pill a little less coffee something. Please don’t write any more comments I need the information I am asking for your interrupting things causing contention its unnecessary.

24

Your question is incomplete to begin with. And you are refusing to hear that because the mathematical logic you are attempting to apply here does not fit.

This isn’t like flipping a coin.

Each trader has their own win/loss ratio and it would be silly to combine them because their reasoning for entering differ. And beyond that and more importantly the risk they apply differs. If anything, perhaps start by finding out the average risk.

Irregardless, you need to go back to the basics. Do you know what a pip is?

25

@Docious

  1. Yes, I had read what you said
  2. No, I didn’t make any comment on your mentality. Try reading what I said.
  3. If you read what I and other people have said (based on greater experience), you will realise you are fishing for something (“one size fits all” statistics) which makes little sense. You have the idea that there are loads of winning traders with similar statistics. Firstly, the average trader (and the majority of traders) loses money. The statistics of winning traders vary hugely from scarcely better than break-even to near perfection (enviable, and rare). There is no universal “loss rate for traders” that is useful. Even if there was was, the size of the losses would be just as important, unless you have the benefit of a time machine. Successful traders may lose most of their trades if they use certain types of method.
26

I’m interested in what you’re doing. I don’t have the data as I understand it that you are asking for. I would guess that there are some great uses for averages in forex that are situational, like success rates for pin bars, high percentage set ups based on market structure being in ones favor, etc. In baseball the last 20 years have shown that you can achieve interesting things by looking at the numbers. I wonder if that would be harder in forex on a macro level, as it seems like the environment is always shifting. Imagine trying to compare yearly batting statistics, but not knowing the pitchers mound was raised or lowered until after the season had ended. I’m looking forward to what you cone up with.

Hogarste: I’m getting the understanding through this thread I started that most people here are doing what is called binary trading: it’s really short trades maybe up to an hour at the most (I’m not entirely sure). This is done using a 50/50 rule. The 50/50 rule us governed by the simple fact that any trade at all can go one of 2 ways up or down: put on a trade or a combination of them with a stop-loss you either win or loose easy you can do 5min ten min 15 min 30min etc gain some pips woohoo (many will put on between 100-200 trades in one days trading). Others prefer the longer trades which are not so much governed by the unpredictable and are more so ruled by a careful watch for the indicators be apparent before placing a detailed trade ahead of time. The binary type of trading is more of a seat of the pants ride on the roller-coaster but the longer none binary outlook takes more patience. Some do one or the other but I am interested in doing both because that makes more sense to me.

I hope you saw that book title that Toekan gave you and also the site he mentioned here below.

they are:
Wiley Trading, Encyclopedia Of Chart Patterns, 2Nd Edition, Thomas N. Bulkowski[2005 Isbn0471668265]
http://www.myfxbook.com

First reason for doing this
I found a good exercise was to use a calculation for the growth of exponents made out of a good trade using a minimum average because I wanted to stay well within the realms of probability. By doing this I can plot how often I want to split the amount I am making: I split it into the amount I would need to take for my own use and the amount I need to leave in there to increase my trades exponentially for bigger gains. It means that when I do start trading and stop using my practice accounts I can then have a well mapped plan with sign posts on the way to indicate how fast things are going.

Second reason for doing this
This is also a tool to help with anxiety while putting on those early trades and to help overcome the temptation to take the trade off early which it looks to be going down. If I have a rule of expectation then when things are looking to be going wrong on the surface then it is easier to let it go and let the indicators work for themselves. Its all about hit and miss but if I know what it can hit and the degree of the miss then I can let my stop-loss do it’s work especially once I know the ratio of losses to gains. At this stage I am sticking with a one in four loss ratio as no one has proved it wrong (as written earlier the 3 wins to one loss using the indicators on the none binary approach is the lowest I would want to use): it would be better if it was one in five but then even if one of the variable involved is up on the lowest possible, e.g. if the loss is not a complete loss and I only loose say 50 cents in the dollar or less then my exponents for the next tradings cycle increases (it’s a win win situation and that is why I went for the lowest possible gain); and it is just the same if. It means I know the pattern to use having done a 3 month plan using a rule of practical use of the lowest possible gains that actually worked.

Other reasons
There are of course many reasons for doing this longer form of trading combined with the short form of trading not the least of them is for sanitie’s sake and well I just don’t like wasting my time on something as mundane as making money would be another. A methodical approach is best for me that is for sure Where I come from there is an 80% crash rate in the amount of new businesses that crash in the first 2 years of trading. I came to understand early that a carefully fashioned business plan is not just a work of art that is a pleasure to look at but it utterly essential if you want to be successful.

ON OUR SUBJECT OF FOREX TRADING AND USING THE STATS
I know these longer style of trading should be used together with the binary approach and am intent on doing that but know that the best way to go is with a plan so that if things do fall apart you have it there in front of you no matter what sort of a state of mind you are in. Doing something like this also gives you an edge in the long term because you learn how to do it and can use it for any mount of things in life. Riding by the seat of you pants just does not get you there in the long term its too much of a gamble. Don’t listen to all of these people especially when they seem to be experts its just not the truth of it. I know I have a lot to learn here and that is why I am asking questions.

I have learned enough to know that it is better to use a 50/50 binary trading style together with a more conservative style using all of the indicators like pennants, triangles, etc to foresee continuation or a reversal. Even with the 50/50 approach its still a good idea to prepare to split your gains and conserve some of them as well as use some of your gains to increase your next trade amount this needs a careful plan because we need to make the best possible use of what we gain in forex or any other kind of trading. I have been a sole trader for over 20 years now and trade is trade no matter what industry or idiom you are delving in or into. Its the people with a plan who have most success in the long term. Working on a plan triggers a lot of essential things and not just the plan itself things are not what they seem most of the time and the most profound discoveries come while working on the plan just as much or even more than when you are actually making the trades. That’s my experience and statistics talk there own language, its one language that is well worth understanding so you can listen to it. Don’t listen to the knockers and mockers listen to the stats they don’t lie like men do and are not fickle or double minded like men are.

Good trading to you

Gregory

27

@Elroch

  1. Yes, I had read what you said
  2. No, I didn’t make any comment on your mentality. Try reading what I said.

“Things are not always what they seem” a true saying and worthy of all acceptance.

28

Not that I am good with math but if markets are considered 50:50 than the spread puts you at an immediate loss.

If every tick ( lets say each tick = 1 pip ) has has a 50:50 chance of up or down than does that mean if we wait for 10 ticks
we have a (.5*.5*.5*.5*.5… you get that) or a .0976% chance that in those 10 ticks it goes up 10 pips or down 10 pips

I am sure there is something about independant events in here

Also something that makes me not believe forex is 50:50 at any point is that if you let say 3000 ticks occur I highly doubt it will show a distribution close to that in price values.

But something to consider is market profile using auction theory where you can see where the largest volume of trades and time that price occurs at and coincidentally it almost always creates a near perfect parabola for distribution.

MarketProfile.png692×592 5.93 KB

*Trade plan here you guys go made in 5 minutes tested it for about 20 trades works fine (sarcasm on sample size)

Step one find parabolic distribution
Step 2 buy at bottom of distribution on a green candle (vice versa for selling)
Step C F*ck the trend.

Exit strategy Leave when a new distribution is created or when your take profit at the center of distribution is hit.

29

Sultyice thanks for you input: I’m thinking the 50/50 theory is like any other just a tag or name given to an idiom.

Step one find parabolic distribution
Step 2 buy at bottom of distribution on a green candle (vice versa for selling)
Step C F*ck the trend.

Exit strategy Leave when a new distribution is created or when your take profit at the center of distribution is hit.

An explanation of terms used by Sultyice


A Parabola is a term used in graphs where a turnaround is indicated (he is talking about the orange markers correct me if I am wrong please Sultyice).
Again correct me if I’m wrong but this or something like this is covered as an indicator and called SAR (stop and reversal) theory, you can see it explained as Parabolic SAR in the elementary level tutes here on babypips for anyone who is interested.

I am still not sure what a pip is as far as quantity goes. It is clearly defined in what I read somewhere as .0001 of the value of a currency (whatever that means)? Yes I’m still puzzled it seems to be a very loose term does anyone know? does it have an exact value? Is it the value of each of the currency pair in relation to point .001 as shown on the right hand side of most graphs when using… say MT4 or any other common software app for trading? If it is clearly explained somewhere in the tutes here then I missed that one sorry and excuse my ignorance but it would be good to have it cleared up by anyone at all to get it clear for us all (its probably one of those things that is a taken and everyone should just know but I don’t).

I am sure there is something about independant events in here

Also something that makes me not believe forex is 50:50 at any point is that if you let say 3000 ticks occur I highly doubt it will show a distribution close to that in price values.

In answer to your question I am sure it is that a trade can be put on to win at absolutely any time but in saying that I could not be so sure myself and would be looking for an indicator as I am sure you could gain some very good winning trades according to my figures with as little as 10 trades per day (this is on paper and has not been proved so don’t take it is a sure thing).

Also I am like you in not being sure about the 50% quantity made on a trade good trade on average (I’m more focused on none binary trading: on trade made when all the indicators line up solid as it seems better for the long term and for working the exponents. Thanks for you input its good to get this to consider. I’m not so interested in binary trading but do want to know all I can learn at this point in time so please be free to make any comment at all.

31

@Akeakamai
Yes and I know of ones who stopped trading at that point they got such a shock and went back to (training) the drawing board because they could. They knew that it is all about on-course corrections when it comes to navigating and not cynicism (Cynicism is for the weak as is pessimism).

Optimism rules…

And pessimism gets you nowhere in case you didn’t know as for that bit of information you just gave me just to say that it is you problem not mine I am clearly not asking for your experience at your first trading session but that which you have learned since. Of course the reality hits and the anxiety that’s exactly why I am asking for this information its because I don’t even want to loose money on my practice account let alone when I trade for real. And no you don’t know me as I don’t know you so give a little please and let go of your cynical slant on ones who are new. There is nothing infallible about me )that is why I am asking questions) but there is something infallible about the figures that is what I am saying and what I am asking you to contribute with. So please give a little your truth bully attitude is the sh*t not any persons first live trading session results.

32

Good luck in getting your data. Investment firms like Goldman Sachs devote hundreds of millions per year into quant research so I don’t think you’ll find what you’re looking for from retail traders. :slight_smile:

33

You are not taking into account other variables that affect outcome. Mainly your TP & SL. Now if you are trading without a stop loss & a TP of 1 pip you might get a better statistical answer.

34

Why do people with long honorary titles to their usernames insist on making forex some complicated thing? Is it perhaps because they are unprofitable traders who live on forums? Forex yrading is not that difficult!

35

This is also a fallacy. The same exact profitable system will have different statistical outcome based on TP & SL. If someone wants a true raw stats of a system, you gotta have the guts to trade it for. No SL & TP of just 1 pip.

36

I am not sure on par sar vs market profile as if you use the indicator it will often give you buy ssignals at the top of the profile.
Keep in mind I don’t use indicators as I suck with them I only look at price levels and spend a long time watching the speed and size of each tick

37

docious,

Deep breath and walk away from the thread. It is okay that not everybody understands you. You want to have the cutting edge on the market… If anyone would do it the same way, it wouldn’t be an edge anymore.

We here (and on other forums) have opinions on everything and anyone…:slight_smile:

When everyone has the edge on forex, there would be noone to pick up the garbage every week…:slight_smile:

39

Gregory (Docious , guessing the 3rd description in the Urban Dictionary) when I read your first few posts I thought ’ wow what a …’

Now I enjoy your questioning mind - an answer of ‘it is what it is’ is not acceptable.

I understand very much the logic of your questioning, in business things are, in a sense, black and white, grey areas are not something an astute business person dwells, we ask a straight question, we expect a straight answer - we act on that answer.

This ‘trading’ thing is not business (as I’ve known it), it’s not binary gambling either - mathematical probabilities play a role similar to the proven mathematical probabilty (see M/s Moore Research Inc) that this week the Eur/Usd would fall.

Forex trading is indeed not that difficult, as indeed all trading is not so difficult, being constructive, helpful and honest can, on the other hand be very difficult.

AK thank you for the help you have given me over the past couple of years.

40

docious,
I guess the best way to settle this, and to understand the traders and possibly find the answers you are looking for, is to trade live yourself for several months…
Whatever happens, get back to us in the second half of this year and share your findings. Most of us would still be here by then.

41

This is probably the craziest post that I’ve ever read here. Really.

Trading concepts are simple in some ways…but the market has a way of kicking all your theory out the window once you start trading live.

Just take gaps in the market as an example. Weekend gaps can, and do mess with systems. I run one of my systems live and on a demo account attached to Zulutrade. Earlier this week I had multiple instances where I had stop orders set on the demo account for one of the yen pairs (don’t remember which one) and guess what happened?

Market opened on Sunday and gaped up in the anticipated direction. Now on my demo account the price that this trade locked in on was at the pending stop order price. But my REAL trade opened up at the market open price plus the spread…and the spread happens to be relatively wide at the instant the market opens. The results of that same trade setup were very different…even though they both closed in profit. The market kept moving up so both were winners…but the demo trade closed out far earlier. Now think about what would have happened if my stop ENTRY had been a stop LOSS for an existing short position. It would have closed in the red with an additional 20 pips worth of loss!

Little things like this jack up expected outcomes that one sees when looking at the charts and building a trading plan. I’ve had trades closed out at the daily change over because my stop was “close” to price at the close/open of the day and when spreads widened the trade manager pulled it out.

Here’s the basic plan for finding a winning system:

#1) Risk/Reward at 2:1 or Greater - I’m a firm believer that ONLY a system which has winners which are significantly larger than the losers can withstand the shocks of market weirdness that inevitably come your way. So you start by looking for a pattern that rewards you with winnings that are double that of your losses or better.

#2) Looks for Win High ENOUGH Ratio in Pattern - whatever pattern you are looking for in the market (assuming you’re a technical trader) make sure that it wins about 40% of the time for a 2:1 system and 30% of the time for a 3:1 system at least 10 months out of the year.

#3) Look for High Trade Frequency - this is probably the biggest thing people miss. Especially with all the “trade less not more” and “beware of overtrading” crowd out there. Really. What IS “overtrading”?? It’s hard to define…just like trying to define when a real trend has been established vs. whether price is in a retracement. You can always tell after the fact…but when you need to get in on the trend you never actually “know” which is which. At best you’re taking an educated guess. Most people can’t give you the right answer as to what overtrading is and as they are scared of it they, in essence, are sacred of something that they don’t know.

Bottom line is that you can find a signal pattern that wins 90% of the time with a full 5:1 risk/reward ratio…but if this pattern only shows it’s face once every 10 years then it’s not going to be a life-changer for the average trader. You need more trades.

So look for a signal that gives 2:1 risk/reward, wins about 40% of the time for 10 months out of the year with the other two breaking even at 33%, and takes at least 50 trades per month.

But you’re not done yet. From here you’ve got to work out the money management to figure out proper positions size.

First you need to know what the largest probable losing streak is for your particular win ratio. For 40% it’s 21 losses in a row. You then need to scale your position size so that when (not if) you hit this bad patch…it doesn’t bring the account down to zero.

At this point you have the essence of a winning system. The further back your backtest goes the stronger you can rely on that win ratio…but there’s not guarantees even then.

And now things just begin to get going. Once live trading, one has to have the dicipline to actually follow one’s own system. Take every trade…even when you’ve just lost 10 in a row…easy to do when calculating the anticipated overall drawdown on paper when working through a potential system…more difficult to do when watching the balance drop. Not pulling trades out early. Easier said than done. Not letting trades ride once they reached that 2x risk position…that is, fighting off the greed for more. Easier said than done…esp after a losing streak.

Even if you could program this stuff into an EA…people find a way to mess things up. Seriously. Trying to “math out” forex is really just a fun little diversion. Like doing crossword puzzles. It’s not a real approach to extracting real cash from the markets in the amounts that will change your life from what it looks like now to what you’d like it to be.

42

@FXRenegade

This is probably the craziest post that I’ve ever read here. Really.

Thanks for that compliment it has really made my day. I really liked and very much appreciated this reply to my post it’s really good information and given me lots to think about (I took a copy of it for my forex info folder).

Yesterday I was out posting advertising flyers in letter boxes, it was hot like 39 Celsius and so in the street even hotter. I ran out of water to drink so went into someones place to ask for water (it looked like a friendly household they had fun stickers on their cars). At the door there was a great caption ‘Gone crazy back soon’ and yes when the lady handed over my refilled water bottles she made a remark that I was mad to be doing that in that sort of heat (I told her I had to). I had enough by 3pm and the heat was peaking. I did it because I know the stats: that at the least I get a 2% return and at the absolute most I get 10%. That’s 10 jobs for every 500 flyers (at the least) and I get 20 for every thousand. I need the cash for trading forex but it’s garanteed an absolute I can rely on it 100%: I just have to have the strength on mind to hold onto that fact and not get swayed by anything negative, this stat is true it comes through for me every time. Even if a whole lot of people did the same thing on the same day as me or close around the same time just ahead of me I would still get 2% or very close to it 1.7 at the very least (I proved this over 20 years). Stats are facts they are absolute the law of averages is reliable if it can be measured it yields a rule.

I like statistics and yes it is a great little diversion as you say but what happens when you actually do this and write out a plan on paper it takes it so much further than just in your head: it forces things out and especially the need to prove it and opens up a whole other process: something I cal on course corrections (providing you are on the right course in the first place). The real power of it is that once on paper no matter what sort of a state you are in mentally or how drained or whatever you can take it out and read it right of the paper (There is always a lot of variables but the stats are taken from the variables they are an average of them). From the variable you establish a percentage which becomes a rule once established (you need as broad a sample as possible to have a reliable sample to establish your rule from: as FXRenegade stated “the further you back-test your data the better”).

I want to thank everyone who has contributed herein the knockers included I remember words from a fictional character that went about chasing windmills “griss for the mill” he said, and there is a powerful lot in that saying. Its all griss for the mill no matter what it is but I’m glad I made this communication.

I’m not sure at all that I am done with this post as no body had answered one of the questions that came to the fore when some one commented on about the third page or so. It’s to have a pip defined: what is a pip? Is .001 one pip or is it 10 pips making .010 100 pips and .100 one thousand pips and 1.000 10,000 pips? I would like to have it confirmed that .0001 is one pip. At this point in time I would like to know this one thing is not a variable but has a value even if it has such an endearing little nickname as pip. It seems to be at the heart of it all so please somebody excuse my ignorance and tell me. I Just need to know this one solid fact as to what to base my figures on… Yes I looked for it in the tute’s here on this site but could not find it, so must have missed something.