Hello,
I have been wracking my brains trying to come up with fact-based strategies for trading. By "fact-based" I mean "mathematical probabilities" as opposed to relying on one or more signals that have in the past produced good results (historical-based trading). As well all know, just because it happened in the past doesn't mean it will happen in the future. My idea is that there are "absolute distribution of probabilities" that the market cannot escape.
Even with using "signals" (moving average crossovers, momentum oscillators, etc), probablilty is 50/50 - it will either work or it won't. There are only two choices. The market cannot escape that fact.
As an example of "fact-based" or "mathematical probabilities", consider this example.
- I put on two long positions.
- The first long position has a take profit of +100 and a stop loss of -50.
- The second long position has a take profit of +100 and a stop loss of -100.
Given this setup, and without me closing positions early, just letting the TP or SL targets get hit, there are only three possible outcomes. The market cannot escape giving me one of these outcomes.
(1) Position 1: +100, Position 2: +100 (BEST OUTCOME).
(2) Position 1: -50, Position 2: +100 (ACCEPTABLE OUTCOME).
(3) Position 1: -50, Position 2: -100 (WORST OUTCOME).
Now, in the long run, the market should deliever outcome (1) 33% of the time, outcome (2) 33% of the time, and outcome (3) 33% of the time. There might be times when distribution of one is more frequent than the other (like outcome (1) in a strong bull market), but in the long run, over time, to me it seems the market cannot escape returning each outcome 33% of the time, since it can only deliver one of those three outcomes. If any one outcome had a statistical probability of occurring more than 33% of the time, then that would be the proverbial "Holy Grail" and the search would be over. The market must act in such a way as to provide equal distribution of probabilities, otherwise everyone would be rich.
So for example, in 3000 trades, assuming even distribution of probabilities, outcome (1) would yield +200,000, outcome (2) would yield +50,000 and outcome (3) would yield -150,000, which would leave a Net Result of +100,000.
This is to show how I am thinking. Has anyone else out there thought this way before? Has anyone ever tried to do this? Is my reasoning flawed? Can anyone tell me why this would not work?
It would seem to me that the 5% of traders out there who are profitable are thinking comepletely different than the 95% unprofitable traders are. It would not surprise me that the 5% of the rich throw out "decoys" and "dead-end trails" for the 95% to follow (like historical-based technical trading systems), sending them down the proverbial "garden path", while the 5% laugh because they're keeping some esoteric secret from the rest of the masses. OK, I realize than sounds like a "conspiracy theory", but think about it, if you were rich, you wouldn't want everybody else to be rich because then, who would be left to work for you? (The purpose of the poor is to service the rich.)
My thinking is that making money in the markets is so simple but yet so hard to find. If we were willing to think in terms of different paradigms, willing to change our way of thinking, maybe then we could see things differently and get that "AHA!" moment that leads us to some blatantly obvious revelation but could only come to us if we thought about it in a way that let this revelation appear?
Any and all feedback is appreciated.
Thanks.