Probability 101
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# Probability 101

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Fat Tails

Haha, Gödel was an interesting, albeit a bit too paranoid, character.

I must say that I am a little disappointed in your answer. I know you like to be argumentative, but keep in mind that this thread assumes no prior knowledge of probability. I expected more from you!

However, you are quite right about preparing for different scenarios. That is exactly how I trade, and I think I've written about it a few times.

The most interesting thing about both the Monty Hall problem and the question I posted are the reactions of others to them. Especially the ones from professors at distinguished universities. Have you read the responses vos Savant got? Marilyn vos Savant | The Game Show Problem

Behind Monty Hall's Doors: Puzzle, Debate and Answer? - New York Times

Back the the problem I presented:

The most logical answer to the question is 0%. I think that is pretty self-evident if one reads the question carefully. One can make assumptions which would turn it into a paradox, but I think those are less logical than focusing on the question itself. What is it exactly?

However, if one were to replace the value of C with 0%, then one has a "This statement is false" situation and one's brain would hop on the Recursive train to Stack Overflow City...

The problem is more about linguistics and logic than mathematics, but so are the markets. Therefore I find the lack of participation in this thread quite surprising. I thought thinking about problems like these are what drives people to become traders. The markets are continuous problem-solving exercises. That was the point of my posts in this thread.

It's not relevant to calculate the probabilities of a coin toss or a rolling die, nor is it useful to blindly apply statistics to the markets. One has to have a logical reason for what one does, and I see that people fail at this again and again. The problem is that most of the material passing as educational is not really useful for intraday trading, and therefore beginning traders should reevaluate the the framework of which they are operating within.

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 March 25th, 2012, 08:05 PM #32 (permalink) Elite Member Quebec   Futures Experience: Intermediate Platform: NinjaTrader wt Rancho Dinero's profiling tools Broker/Data: Stage 5 trading/AMP/CQG Favorite Futures: ES, NQ, YM     Posts: 3,698 since Oct 2009 Thanks: 3,042 given, 4,498 received @Lornz, To foster participation maybe we should try to come up with something practical directly related to trading. How would you define a high probability setup? or what properties or characteristics must a setup have in order to be considered a high probability scenario? Given what FT71 said in the webinar, the notion of a high probability setup is mostly an urban legend. Would be curious to know what's your take on this. Last edited by trendisyourfriend; March 25th, 2012 at 08:45 PM.

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Oslo, Norway

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trendisyourfriend
 @Lornz, To foster participation maybe we should try to come up with something practical directly related to trading. How would you define a high probability setup? or what properties or characteristics must a setup have in order to be considered a high probability scenario? Given what FT71 said in the webinar, the notion of a high probability setup is mostly an urban legend. Would be curious to know what's your take on this.

My point was just that I just assumed people would be more interested in logical problems. The ability to reason is one's most important tool for trading success. People keep searching for someone to tell them what to do, and by doing so they are effectively running away from what might lead them to success.

To be perfectly honest, I cringe when I hear the term "high probability setup". The point of this thread is eradicate such terms from one's vocabulary.

Trading is about squeezing as much money as one can out of the markets while minimizing the risk of ruin. There are many paths to take, but most have a limited shelf life. Continuous reinventing is required, unless one manages to create a self-adapting system.

I've always find it funny when I read about quantitative funds speaking of rapid deployment of algorithms due to the short timespan of the inefficiencies, yet every retail traders expect to find something that works forever.

For people taking directional binary bets, there are really only two strategies: continuation or reversal. However, identifying market state is very hard to do.

As a discretionary trader the key to success is good intuition coupled with exceptional risk management, or vice versa.

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Lornz

@Lornz: You missed the opportunity to start a thread on Probability 101, but you could start one on paradoxes. I think that we should not blend both subjects into a single thread, as both subjects are too heavy to digest to combine them into a single menu.

The paradox, whether we refer to Epimenides or Russell, is based on self-containing sets requiring iterations which do not have a solution within the framework of classical logic. The trading world is full of iterations (feedback loops) and it is certainly full of paradoxes. So it should be a rich and entertaining subject.

But please keep it out of this thread on probability. Try to resist the temptation, otherwise this thread will mute into a playground for a few diabolic members of Big Mike's making fun of everything.

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Lornz

You could be honest and say, I am an INTJ and I do know more than you buffons....here are my nuggets for you peasants for today, now kneel in my hallowed presence while I retire to my cave.....

About probability, quantitative algos and inefficiency... that would fly in the face of the apparent oxymoron that markets are forever changing, yet they are the same all the time, because human behavior is unpredictable individually but not collectively.....that would very much line up with the notion that the trained and skillful discretionary trader will build a mental edge over the rest of the untrained milieu that could be practised into perpetuity......extending that statement (if you do not disagree with that premise), one could then wrap one's head around the notion that such a contrarian whose intangible edge it so far "un - fathomable" and unquantifiable to binary logic (barring a break through in AI) could implement a high "chance" trade.

Last edited by Deucalion; March 27th, 2012 at 07:10 AM.
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Oslo, Norway

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Fat Tails
 @Lornz: You missed the opportunity to start a thread on Probability 101, but you could start one on paradoxes. I think that we should not blend both subjects into a single thread, as both subjects are too heavy to digest to combine them into a single menu. The paradox, whether we refer to Epimenides or Russell, is based on self-containing sets requiring iterations which do not have a solution within the framework of classical logic. The trading world is full of iterations (feedback loops) and it is certainly full of paradoxes. So it should be a rich and entertaining subject. But please keep it out of this thread on probability. Try to resist the temptation, otherwise this thread will mute into a playground for a few diabolic members of Big Mike's making fun of everything.

Yes, I agree with your post and I apologize; I keep forgetting the title of this thread. I actually posted the picture as a joke, but I didn't manage to suppress my love of philosophy and logic in the following posts. However, I think that the 0% answer is a good way of thinking about probabilities related to trading, as many seem to operate on false premises. A complete reevaluation of the framework might be better than blindly assume success is merely about combining the right variables within it.

My point was simply that the way most traders use probability is a paradox to me...

I will probably refrain from starting a thread on paradoxes for now, simply because I am afraid it might be too time-consuming. The reason I seldom speak of such matters is not necessarily due to a lack of knowledge (although I am not an expert on the subject), but because I mainly use trading boards as a stress-reliever. It appears that you possess more patience than I do, and I applaud you for it.

It's seldom fruitful to discuss deeper subjects on trading boards; there is simply too much noise, and people are terrified of revealing something that is actually useful. I find it sad, because I have so much to say on the subject. But my retirement fund is not big enough yet...

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Deucalion
 You could be honest and say, I am an INTJ and I do know more than you buffons....here are my nuggets for you peasants for today, now kneel in my hallowed presence while I retire to my cave..... About probability, quantitative algos and inefficiency... that would fly in the face of the apparent oxymoron that markets are forever changing, yet they are the same all the time, because human behavior is unpredictable individually but not collectively.....that would very much line up with the notion that the trained and skillful discretionary trader will build a mental edge over the rest of the untrained milieu that could be practised into perpetuity......extending that statement (if you do not disagree with that premise), one could then wrap one's head around the notion that such a contrarian whose intangible edge it so far "un - fathomable" and unquantifiable to binary logic (barring a break through in AI) could implement a high "chance" trade.

Funny! I think some of us do seem to think like that here

Ok, about the probability part, those are a lot of lofty words. Here's my answer in the form of cold hard candles. Here's yesterday's CL chart, with my 'dumb' indicator signals (arrows & triangles) on what most would call a totally crappy range bound day. I have marked every signal with a red circle for loser, and blue rectangle for winner, trading every 'dumb' signal with a 2:1 r/r 6 tick stop/12 tick Target. 24 winners, 17 losers, 59% win ratio, about \$1700 - about \$200 commissions total around \$1500 profit. I can post this chart everyday for the next week if you want, the results are always the same, around 60%-65% win ratio.

I've been trading this 'dumb' method for 7 years. This is how you use probability in trading, you develop a signal, you calculate the probabilities using historical sampling, then you take every occurrence of that signal, and rely on those probabilities to make you profitable or not. Examine the chart, and then tell me again about all the trained, skilfull, mental edge, discretionary, blah, blah, blah. All rationalizations of traders trying to make themselves feel good. My answer is "There is more then one way to skin a cat".

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Last edited by monpere; March 27th, 2012 at 11:17 AM.
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Membership Revoked
Oslo, Norway

Platform: CQG, Excel
Favorite Futures: CL

Posts: 1,198 since Apr 2010

Deucalion
 You could be honest and say, I am an INTJ and I do know more than you buffons....here are my nuggets for you peasants for today, now kneel in my hallowed presence while I retire to my cave..... About probability, quantitative algos and inefficiency... that would fly in the face of the apparent oxymoron that markets are forever changing, yet they are the same all the time, because human behavior is unpredictable individually but not collectively.....that would very much line up with the notion that the trained and skillful discretionary trader will build a mental edge over the rest of the untrained milieu that could be practised into perpetuity......extending that statement (if you do not disagree with that premise), one could then wrap one's head around the notion that such a contrarian whose intangible edge it so far "un - fathomable" and unquantifiable to binary logic (barring a break through in AI) could implement a high "chance" trade.

Haha! At least you're right about me being an INTJ...
However, it's not due to arrogance that I posted those links. I simply find it meaningless for me to write more than I have to. I also thought that some lurkers might find them interesting. @Fat Tails is obviously a smart man, and I'd be a fool to attempt to lecture him.

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Oslo, Norway

Platform: CQG, Excel
Favorite Futures: CL

Posts: 1,198 since Apr 2010

monpere

That's a decent trading system. Are you taking the signals manually or is it automated? Do you filter signals at all? Market or limit orders? Slippage?

There's no point in posting a chart, though. Post the trades in real-time or set up a trading room with live sharing of your screen. That is a sure way to be pestered with PMs for the rest of your life... Assuming you're not making this up, of course. But I don't think that is the case.

Personally, I trade in a different manner. CL usually have larger gyrations than your targets, and I try to limit transaction costs. But, as you said: "There is more than one way to skin a cat".

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