Risk-reward and probability are inversely rewarded. A sure thing will have a low reward, low probability trades - higher profit. Can’t get away from it.
Must be nice to get up every day knowing exactly what the market is going to do.
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I’m sorry, I’ve been working on this nonstop. It is not the win% that makes the profits or losses. It’s the distribution of wins and losses. I’m starting at the equilibrium of a 1:1 or 50% win rate, for now. Starting to lean towards a 1:0.95ish just so there’s more chance of wins.
If there is a strategy with a 33% win rate, but the losing streaks are at: 90% of the time 2 losses for every win, 8% of the time 3 losses for every win, and 2% of the time they are streaks of 4+, we can tailor position sizing to be able to double an account around 4 times before losing an account; withdrawing every 100%.
Indicators derived from historical price action are useless in future predictions… if they have any predictive qualities or detect market inefficiencies, a computer would do it in milliseconds. Liquidity or efficiency of the market is indicated in the spread and price movement. More narrow the spread, more efficient the market is. Wider the spread, less efficient the market is and more volatility… like we’ll see on FOMC today.
There is no way to predict future directional price movements, as directional trading relies on someone to buy higher than you or sell lower than you. To think we’re that good to outsmart the market is futile. We succumb to the probabilities… which are directly correlated the relationship of the ‘Risk’ to ‘Reward’. I know it doesn’t make sense. Without a defined edge (spread) retail traders are only here to keep supplying liquidity to someone else.
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i agree with almost everything you’ve said just above
i think you’re slightly overstating that, in practice, though the principle is usually valid … i think they can have some value as probability functions, and it’s a semantic point whether or not you want to call that “predictive” (i would actually argue that it is, in a sense, predictive)
there are, in fact, some small-to-medium-sized hedge funds - and maybe others, too - successfully doing exactly that
There is going to be a profitable range of position multiples after a loss depending on the W/L distribution… You’ll have you be able to increase the account to +100% before the risk of ruin catches up. Too small of increase, not enough, too large, a “common” streak will kill the account. I’m still working on a way to define that. Currently falling in to the rabbit hole of Markov Chain outcomes…
I’ve only really used Volume Profile to plot areas where price is more likely to stay (liquidity) and where price cuts through (illiquidity). A VWAP may help… but so far I haven’t had time to correlate that with higher probability. Any suggestions are welcome. I’ve only discovered this recently… haven’t been able to bounce it off anyone yet.
You need 9wins to every 1loss to be professionally profitable via discretionary, at 5/5 you will be neutral, anything less will be negative, if you are doing arbitrage it’s 1large win to every 9loss where the losses need to be near zero, always has been like this, and always will be like this.
Youre flipping a coin which uses a constant “strategy”. The flip is constant. Lets say we flip the coin under different circumstances for example with a different gravity constant. Will it still produce 1:1 results? The strategy plays a significant part in the win rates of these RRR’s. Change the strategy and you change the RRR if the strategy doesnt have a strong correlation with respect to results to the original strategy. Period. Your results are based on YOUR strategy over years. That data is unique to your strategy, for the most part. Nothing wrong with your analysis. But it is not universal. Only thing we can conclude is that RRR is more likely to hit the smaller it is meaning the less distance price has to travel to hit it. Period.
Could you just clarify please?
Do you say that all strategies with a r:r of 1:1 therefore must have a win rate of 50%?
Or just the theoretical situation you’re using as an example?
In an efficient market, the win % is directly correlated to the risk:reward. If entry criteria has a proven edge and can define a market inefficiency, the win % will beat the expected win %. This is very very difficult… market makers fight just to make 52% and lose 48%.
I use ‘overall’ sample sets as we plan to trade in the long term. Many strategies I’ve seen don’t give an entry signal on trades that would have been winners, skewing the results randomly.
I ran some numbers today. Just to clarify here:
a 1:0.5 R:R has 75% win expectancy. You need to win 67% of the time to breakeven.
a 1:0.9 R:R has 55.5% win expectancy. You need to win 52.6% to breakeven.
a 1:1 R:R has 50% win expectancy. You need to win 50% to breakeven.
a 1:2 R:R is twice has difficult to win, has a 25% win expectancy. You need to win 33% to breakeven.
A 1:3 is 3 times as hard as the 1:1, has a 17% win expectancy. You need to win 25% to breakeven.
A 1:5 is 5 times harder than the 1:1, it has 10% win expectancy, need 17% wins to breakeven.
When we trade at R-multiples of >1 (<50% win rate), that gives the trade’s counter party a R-multiple of <1. (>50% win rate). Price at entry does not matter, as long as the market is efficient at the time.
You’re forgetting an important aspect. Markets have many times been prooved to be non efficient, meaning people are able to find an Edge or at least temporary edges.
If markets where efficient, no one could Make money, cause spreads, fees and commissions would wipe out any profits you have.
So the basic idea of trading is that you have an Edge, that Will turn a 1:1 RR trade from 50% probability to 60 or even higher.
If you haven’t found an Edge… dont even bother trading.
This said, IMO opinión, as I said in previous posts, it’s better to avoid having a fixed RRR, small risk with variable reward is What works best. The market Will let you hit a home run every now and then. Say 50% trades hit SL, 25% breakeven, 20% a 3R profit and 5% home runs 10R profits. Even with 75% no profit trades, you are very profitable.
Offtopic, as you mentioned indicators, they are of course not predictive, but they are interesting.
It’s good to know that price has deviated from an average, or that price is above or below average at this moment.
Also it’s interesting to know that price is having a stronger or weaker momentum than in recent past sessions.
This type of indicators can help asess market conditions, and adjust your strategy and Bias accordingly. Just Tools.
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Indicators that are derived from historical price have no predictive properties. I can tell by looking at a chart where the RSI(14) will be, same for ADX, MACD, Bollinger Bands, ect. They are all formulas derived from historical prices. They can only negatively skew expectations.
Knowing the distance price is from an average (MA), or where an average is relative to another average (MACD) has 0 predictive properties of future participants.
What is your trading edge then?
I have noticed (as everyone has) that ATR in most majors consolidates at the end of NY session and doesn’t start expanding until London open. I’m sure I can use the ATR contraction as efficiency and it’s expansion as the market moving to find a price equilibrium.
Thank you. I take on board that this is all theoretical.
I’m using a 1:1 risk:reward model. Skewing the results slightly in your favor can be done via a Vig in sports betting, a spread or commission in financial markets.
It doesn’t Matter What my Edge is right now, coz as I said, market conditions are always changing, and edges are temporary…
You need to keep constantly logging… testing and finding new edges…
Even indicators can offer and Edge when using the correct combination and parameters…
Professional traders use indicators. This retail idea that professional traders only used naked charts is ridiculous…
Mean reversión strategies have been proved to work in many market conditions, and they are indicator based.
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‘Coz’ you don’t have one and you wouldn’t know what an edge is.
Edges are not temporary. Start by finding the worst strategy with the most losing edge, then reverse it. Indicators or not.
You’ll never learn anything if you just asume that whatever other people say it’s just BS
You think you are the first person to think about reversing a loosing strategy in order to get a profitable Edge ? What a genius!
Obviously, you have never quantified the markets, nor have done strategy testing at all. You just asume that whatever you say is the right thing. So why you even open a discussion then?
Dude, just open your mind ok? I’m telling you… edges are temporary… you may find a working strategy, It Will work for sometime, maybe It Will have a 70% win rate for a while, and then It Will fall to 50% win rate… As the market tends to be efficient. It Will not fall to 20%, coz then you could just reverse It.
Even more, once a strategy starts working well for a while, it’s sometimes a good idea to trade reversing the strategy, as It Will normally start going for efficiency, so you could trade against the strategy, until it reaches the 50%
Specially nowdays, with so many AI and neural Network blackboxes in the market, edges are temporary, more than ever.
Also sometimes, once a strategy reaches 50%, you may see a deviation, meaning that It starts working again for a while. When this happens, market tends to balance It, so you can start reversing the strategy again, until it reaches the equilibrum.
This happens always. Say for example for the last 5 days the 50ma and the 100 MA bullish Cross on a smaller timeframe has given a performance of 30 pips on average
I guarantee that when this happens,you should start shorting the Next crosses, as the strategy performance Will mean reverse, it’s not going to work forever.
The way you find edges is quantifying market behaviours and looking for deviations, as they Will always balance
i wish i knew the fact that how trading forex is a strong thing and how much it needs a lot of analyze
it really need you to be good-shaped and being carefull about anything, also it can effect your attitude and the way yo do things
overall i thought it is easy but in fact it is not