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So-Called "High Probability Trades" and Statistics
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So-Called "High Probability Trades" and Statistics

  #1 (permalink)
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So-Called "High Probability Trades" and Statistics

Hi all,

I don't want this to sound like too much of a rant. I cam to the conclusion that either a) I am pretty clueless, or b) the meaning of words (such as "probability") mean different things to me than to people with more of a trading background. This post is similar to @shodson 's thread here: https://futures.io/traders-hideout/4728-its-high-probability-trade.html

There are these terms like "high probability trades", and people saying that "I never take a trade unless it has at least a 2:1 return". Statements like this do not make sense to me.

Let's take high probability trades as an example. First, there is the sloppy language that really means "high probability of making a positive return", and not what the simplest interpretation of the words imply: "a high probability of occuring." By saying a certain trade is likely to be a winner, there are two probabilites involved: a) the probability that the setup/entrance is good, and b) the probability that market moves in the direction congruent with the setup at time of exit. Now, a) is fairly easily known. But, on a case-by-case basis, b) cannot be known until after the trade has occured.

Now to the second example. People saying that they only trade trades that have a X or better statistic. By saying this, they are saying that the probabilites of both the entrance and exit "add up" (multiplied, really) to their threshold statistic for entering the trade. But, how do they know their exit statistics before the fact? They cannot.

The only way to know the probabilities of any trade is to compute the statistics after the fact, from a group of trades (preferably, at least 30). From this collection of trades, we can compute statistics to wahzoo to our heart's content. But! We can only say, for example, "This group of trades has a profit factor of N." We cannot say "Because the group of trades had this profit factor, this particular trade had the same profit factor." We can go back and calculate the profit factor for a trade after that trade has occured. But, estimating the profit factor before the trade has occured (or finished) requires extrapolation of the market forward in time - something wrought with much uncertainty.

My question: Do most traders use nebulous/sloppy (maybe wrong?) terms, or am I missing something huge? Is there some way to estimate exit efficiency before the exit has occured? Am I dumb, or am I overthinking this?

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  #3 (permalink)
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From google ......

Probable - likely to be the case or to happen .
Probability - the extent to which something is probable .

I avoid saying "high probabilty" because shodson might lambaste me LOL . According to the above definitions "high probability" just means something , like certain variables , is very likely to happen . If people use that term without having tested those variables is unknown but its my impression "high probabilty" is thrown around loosely .

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I log all posts on futures.io (formerly BMT) and have calculated that 16.8% of all posts make some sort of statistical claim. Of the 16.8%, 68.9% are in fact winners, equating to an expectancy of 11.57%. I also calculate a quantile sigma deviation using the Dr, Scholls method and have found the deviation to be within +/-1.4% over time, so I believe it to be a highly reliable figure for purposes of extrapolating future results. However, I have yet to figure a mechanical/formulaic method to maximize my exit efficiency when reading crappy posts. I still have a tendency to hang on too long and exit way later than I should. That said, with practice I have been able to increase my personal expectancy to 13.26%, but I believe it's primarily the results of thousands of hours of screen time as opposed to some "Holy Grail" of crappy post filtering. Hope that helps.

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Most people throw these expressions around without understanding them. There are lot of worthless buzzwords in trading, many of which relate to a lack of understanding of statistics and probability.

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vegasfoster View Post
I log all posts on futures.io (formerly BMT) and have calculated that 16.8% of all posts make some sort of statistical claim. Of the 16.8%, 68.9% are in fact winners, equating to an expectancy of 11.57%. I also calculate a quantile sigma deviation using the Dr, Scholls method and have found the deviation to be within +/-1.4% over time, so I believe it to be a highly reliable figure for purposes of extrapolating future results. However, I have yet to figure a mechanical/formulaic method to maximize my exit efficiency when reading crappy posts. I still have a tendency to hang on too long and exit way later than I should. That said, with practice I have been able to increase my personal expectancy to 13.26%, but I believe it's primarily the results of thousands of hours of screen time as opposed to some "Holy Grail" of crappy post filtering. Hope that helps.



This post made my day....

Simplicity is the ultimate sophistication, Leonardo da Vinci


Most people chose unhappiness over uncertainty, Tim Ferris

Last edited by PandaWarrior; November 29th, 2011 at 12:43 PM.
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  #7 (permalink)
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The claim of only taking high probability trades always gets me too. I've created a number of systems with high probability trades but yet the overall system is still a loser. But yet within the context of that system I can make the claim that I only take high probability trades.

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  #8 (permalink)
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vegasfoster View Post
I log all posts on futures.io (formerly BMT) and have calculated that 16.8% of all posts make some sort of statistical claim. Of the 16.8%, 68.9% are in fact winners, equating to an expectancy of 11.57%. I also calculate a quantile sigma deviation using the Dr, Scholls method and have found the deviation to be within +/-1.4% over time, so I believe it to be a highly reliable figure for purposes of extrapolating future results. However, I have yet to figure a mechanical/formulaic method to maximize my exit efficiency when reading crappy posts. I still have a tendency to hang on too long and exit way later than I should. That said, with practice I have been able to increase my personal expectancy to 13.26%, but I believe it's primarily the results of thousands of hours of screen time as opposed to some "Holy Grail" of crappy post filtering. Hope that helps.

You might try running a Beysian particle filter on your output using a $300/month proprietary expert review subscription (www.uber-bigmike.com) as the a priori initialization to increase the expectancy by increasing the entrance efficiency. Works for me. I have a personal expectancy of 13.28%.

Great post...

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Eric j View Post
I avoid saying "high probabilty" because shodson might lambaste me LOL

My lambaste gun is cocked and loaded

For sure, probability of success is just one piece of the equation to profitability. If I take a trade with a 1 tick target and a 100 tick stop it will have a very high probability of hitting my target, but it probably (pun-ny) won't be profitable over time.

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"Am I dumb, or am I overthinking this? "

Brother I understand. I know exactly where you are coming from. I have felt this very same way before, and alot. This trading thing in my personal opinion can not be statistically measured in any sense. I do believe that the men and women who can refer to their trades in some sorta of statistcal sense, are only those who have thousands of hours of screen time. They have learned through trial in error which trade or trades to filter out. They base this only on the pure and simple fact, that they have seen that trade a hundred times, and have been burnt from it a hundred times. And even though it fit every rule they got. It's just not a winner, and they have learned to just not take that trade. They can do what no computer can, which is take everything they have, all the tools that they have, and screen time that they have, and just filter out those trades which are not going to work.

You can not teach discretion. You can not read a book, or follow a rule to gain your own style, it has to be won painfully through failure, and alot of screen time. It can be done. Your not stupid your just finding your style and that takes time. If it weren't so, I'd of told you different.

1. Price action.
2. Indicators are helpful, but you have to learn when the rules can be broken, and cant be broken.
3. Money Managment.
4. Fibonacci Retracements and extensions work, but not because Fibonacci works. It only works becasue a large majority of traders use it.
5. MA work, but not because MA work, but becasue a large majority of traders use them.
6. You have to learn when all of these tools rules can be broken, and when they are being obeyed.
7. What news is important to your paticular market? Better know it, or could be a bad day for you.
8. Whats said on the TV your listening to might move the market, but you cant trade it.
9. Contract rollover date, know it, or else.

These are alot of the things that I continually go over in my head. Becasue I have been burnt on all of them many times over. These 9 things are my own personal disaster waiting to happen. For whatever reason I just continually broke them. I felt really stupid, what the hell was I thinking?? I just went short again and the 50 ma is long WAYYYY LONG. Ever done it? Sure you have, we all have.

In my own case and personal opinion you have to find your own style. Nothing else will do.

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