Probability 101
 Updated: May 16th, 2018 (11:11 PM) Views / Replies: 24,717 / 66 Created: March 24th, 2012 (12:23 PM) by Hotch Attachments: 5

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# Probability 101

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Oslo, Norway

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Fat Tails
 Some more videos, plzzz.....

Yes, that's why I never discuss mathematics with strangers on message boards. The risk of ending up in an infinite loop is far too great!

What about my picture? I was hoping that it would spark debate.

Last edited by Lornz; March 25th, 2012 at 05:30 AM.

 March 25th, 2012, 05:33 AM #22 (permalink) Elite Member Copenhagen, Denmark   Futures Experience: Advanced Platform: Fib Fib and Fib.! Favorite Futures: Setup   Posts: 299 since May 2011 Thanks: 55 given, 160 received I guess if I wait for the next 12 day to occur. Then it will give good probability.. Attached Thumbnails

Membership Revoked
Oslo, Norway

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Lornz
 My dinner is burning on the stove, so I'll leave you with this: Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

I can't let this go.... I found it yesterday and that is the most fun I had all week. I haven't seen so much confusion among seemingly competent people since the Monty Hall problem (which Hotch said he would introduce later).

I think problems like this is a great way to really grasp the concept of probability. I spent quite a bit of time on the Monty Hall problem, but it was "mind-twistingly" fun and it really intensified my interest in the subject.

I'm on my way out now, but hopefully there will be some discussion.

P.S. For the more advanced participants: What if I were to change option C to 0%?

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Elite Member
Ingatestone

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Big Mike
 I am saying each trade is either a winner or a loser. If I ever said it has a 50% chance of winning and a 50% chance of losing, then that is not what I meant and would be happy to correct myself. I am saying regardless of your edge, regardless of your probabilities, each trade can be a winner or a loser. So you need to be prepared for that loser, even if you have a very big edge, because you cannot predict the outcome of the next trade. The outcome is either a winner or a loser, even if you have a 99% edge, the outcome of the next trade is the same. You cannot predict the outcome of the next trade, regardless of your edge. Mike

Everyone agrees on this Mike, unfortunately it's not what you typed*, or what FT71 said in the webinar. It's obvious to you, but I think it's confused some members.

Will still try to post some interesting stuff to keep this thread alive though, probability is fun

*

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Elite Member
Berlin, Europe

Broker/Data: Interactive Brokers
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Posts: 9,682 since Mar 2010

Lornz
 I can't let this go.... I found it yesterday and that is the most fun I had all week. I haven't seen so much confusion among seemingly competent people since the Monty Hall problem (which Hotch said he would introduce later). I think problems like this is a great way to really grasp the concept of probability. I spent quite a bit of time on the Monty Hall problem, but it was "mind-twistingly" fun and it really intensified my interest in the subject. I'm on my way out now, but hopefully there will be some discussion. P.S. For the more advanced participants: What if I were to change option C to 0%?

If you want to discuss feedback loops you could open another thread on how the work of Kurt Gödel may be used to enhanced trader's performance.

The Monty Hall problem has nothing of a paradox. It requires just to understand the difference between an ex-ante and ex-post probability. It would well fit into this thread. I even see a direct relationship with trading. If you do your daily preparation you should put up several scenarios of what could happen during the coming trading day. Price action of the first hours will then more or less validate some of the scenarios, and you will see probabilities for the different sceanrios shifted in the same way as the opening of a door shifts the probability for the Monty Hall scenarios.

The Monty Hall thing is too simple to discuss, once you understand what a conditional probability is. It is more of a subject for self-acclaimed experts and regular's table discussions.

Last edited by Fat Tails; March 25th, 2012 at 09:32 AM.
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Elite Member
Bala, PA, USA

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Fat Tails
 I think the problem is here that you are trying to redefine something, which is already clearly defined. This would be similar as calling a tree a whale. In that case I can see that there is a couple of whales in my garden. "The Odds" is a concept that has been used for ages and defined by mathematicians. Both "The Probability" and "The Odds" assume that either there have been numerous trials of toin cosses or something else before, or that either there is an inherent probability that weighs on future events. The only thing different between "The Probability" and "The Odds" is that they are different ratios. "The Odds" isthe expected ratio of favourable outcomes divided by unfavourable outcomes. "The probability" is the expected ratio of favourable outcomes divided by all outcomes. Nothing mysterious. By the way if the odds are 1:2, this implies a probability of 33.3% - not 50%. Why don't you watch the video post by @Lornz? The difference is well explained.

Again with the bad analogies. You need to watch the videos again. It clearly says that odds and probabilities are not the same thing. Just because you can convert one number into another, it does not change the concept. Watch the videos again and listen for the terms 'theoretical probability' and 'experimental probability'. You cannot realistically use theoretical probability in trading, you have to use experimental probability, which requires a sample base. When I said 1:2, 50%. 50/50, I was not converting odds to their implied probability, I was showing what I 'think' the logic of the original poster was (whether right or wrong) for saying that the outcome of the next trade is 50/50, I thought I made that clear in my post.

Last edited by monpere; March 25th, 2012 at 07:10 AM.

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monpere
 Again with the bad analogies. You need to watch the videos again. It clearly says that odds and probabilities are not the same thing. Just because you can convert one number into another, it does not change the concept. Watch the videos again and listen for the terms 'theoretical probability' and 'experimental probability'. You cannot realistically use theoretical probability in trading, you have to use experimental probability, which requires a sample base. When I said 1:2, 50%. 50/50, I was not converting odds to probability, I was showing what I 'think' the logic of the original poster was for saying that the outcome of the next trade is 50/50, I thought I made that clear in my post.

We are getting into some textbook discussions. Of course there are different concepts of probability. One is the axiomatic definition set up by Kolmogoroff in the 1920's, another one the probability based on the law of large numbers (or experimental probability) and another one is the probability based on the theoretical design of the experiment (theoretical probability).

If you get a regular die, you know that there is a probability of 1/6 for each of the possible outcomes, even if you have not tested it. So you do not need the experiment to grasp the outcome.

But again, there is no conceptual difference between the odds and the probability. Both concepts can be applied to theoretically or experimentally derived probabilities.

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Fat Tails
 We are getting into some textbook discussions. Of course there are different concepts of probability. One is the axiomatic definition set up by Kolmogoroff in the 1920's, another one the probability based on the law of large numbers (or experimental probability) and another one is the probability based on the theoretical design of the experiment (theoretical probability). If you get a regular die, you know that there is a probability of 1/6 for each of the possible outcomes, even if you have not tested it. So you do not need the experiment to grasp the outcome. But again, there is no conceptual difference between the odds and the probability. Both concepts can be applied to theoretically or experimentally derived probabilities.

Do you believe you can realistically use theoretical probability (no historical analysis sample) to determine the chance of the outcome of the very next trade? This is the point I am trying to make, I think in trading only experimental probability applies (using historical sample). Theoretical probability, although it makes for a lively discussion, in terms of trading it is a waste of time. So are comparisons of trading to to coin tosses, dice rolling, Michael Jordan dunks.

Last edited by monpere; March 25th, 2012 at 08:10 AM.

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Fat Tails

I disagree with this, but I haven't got the time to answer now. I just wanted to let you know to I plan to reply when I get back, as I am sure you will appreciate it!

The question in its original form is solvable! (at least from my philosophical point of view)

Last edited by Lornz; March 25th, 2012 at 05:03 PM. Reason: shouldn't write while overly stressed.

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@Big Mike

I think there seems some basic confusion...or most are missing like this

If we try to think of probabilities to Outcome of Trades or Coin Toss...then they are actually the probabilities of elements in their Result Sample.

RESULT SAMPLE ( Trade ) = { WIN, LOSS } 2 elements , 50% for each element in sample.

RESULT SAMPLE ( Coin Toss ) = { HEAD, TAIL } 2 elements , 50% for each element in sample.

This should be clearly distinguished from probabilities calculation generated from elements of Actual Process Sample.

ACTUAL PROCESS SAMPLE ( Trade ) = { WIN due to Profit Target, WIN due to wide stops , WIN due to small Profit Target , WIN due to abnormal spurt , .......,......,.....LOSS due to Stop, LOSS due to large profit target,...,.....,.... }

Infinite elements , probability calculation is clearly futile ...

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