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.
Quote:
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.
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It won't work. Your math is off.
These are the actual probabilities:
(1) Position 1: +100, Position 2: +100 /
27.28%
(2) Position 1: -50, Position 2: +100 /
36.36%
(3) Position 1: -50, Position 2: -100 /
36.36%
This does not factor in the spread. If it did it would look even worse.
The reason the three scenarios do not have an equal chance of occuring is because Position 1 does not have an equal chance of hitting profit vs hitting the SL.
Position 1 is twice as likely to get stopped out as it is to hit profit.
It is twice as easy for a pair to move 50 pips than it is to move 100 pips.
Position 1 will be -50, 66.7% of the time
It will be +100, 33.3% of the time
Position 2 will be -100, 50% of the time
It will be +100, 50% of the time
If you put on this trade 100 times, this is your probable results:
+200 pips 27.26 times = +5452 pips
+50 pips 36.36 times = +1818 pips
-200 pips 36.36 times = -7272 pips
Total = +2 which is caused by rounding errors
Real total = 0 pips
This doesn't factor in the spread.
The spread actually changes the probabilities a small amount.
A good approximation is to take 200 trades (100 @ 2 positions each), multiply by the spread and subtract from the 0 total.
If the spread is 3 pips then you will lose 600 pips every 100 trades.