Quote:
Originally Posted by billbss
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.
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.
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Looking over the math I see there is a glitch in the total pip outcome for probability 3 it should be
-150 pips 36.36 times = -5452
Not
-200 pips 36.36 times = -7272
This should in turn give you a remainder of +1818 pips
Which will give you ample room for the 600 pips in spread
As per filtering. Just use the “law of large numbers” Why not? It seems to work for the guys in Vegas.
Means of increasing efficiency. Try using the second law of thermodynamics “conservation” potentially a slightly tighter stop may have little impact on the total probability of wins and losses. In doing so you conserve capitol and should be able to increase your results. Even if only tightening the stop by 2 pips.
Although I do agree with bill its harder for the market to move 100 pips than it is 50 pips. If 27.28% and 36.36% are correct variables for the outcome. Then it actually does have a chance.