Probability based thinking

1. ## Probability based thinking

Hi there!

It's been said that traders have to deal with probabilites. Let's reflect about that for a while.
Trading has two major characteristics: uncertainty (undefined outcome) and risk (potential losses). When they come together, it can be tough to make decent decisions - it's no surprise that many traders struggle to make and preserve profits.
But uncertainty and risk have relationship between each other - the more you eliminate uncertainty (say, you have additional confirmations for a trend), the less upside for your trades you have.
Many trades like to have high rate of probability for their trades. But probability is a frequency of certain outcomes within given amount of data. If you flip a coin 100 times and have tails 80 times, you have 80% probability of "getting tails" your side. In trading, setups that give you high rate of success, often have pretty modest magnitude. What is magnitude? It is a relative size of payoff (or loss) that you have if you get heads instead of tails (in other words, what result do you expect to have if you get heads)

In most case, probability of given scenario has nothing to do with success without knowing size of the magnitude. It's magnitude that matters when it comes to trading - eventually, we are here to make money, not to be right.
In his book "Fooled by the randomness", Nassim Taleb describes the following situation: he was short on stock index futures, and his colleagues asked him about his view on the market. He said that market would probably go up with 70% probability. They were confused - "why at all are you holding short positions?" He explained to them that payoff from the rest (30%) would be much more significant and would exceed payoff from expected event several times. Thus, he had more upside than downside having an edge in his positions. Does it mean that he expected to earn money in his positions? Absoutely not, at least for the given trade. He knew that most of the time he will do breakeven or lose some, but extreme (and less probable) events would nicely reward him. So, this example shows that probability is not as important as magnitude - it's magnitude that matters when it comes to outperforming average results.
But does probability make any sence in this case? Well, yes, otherwise trading would be completely random process. Trader could easliy run out of his entire trading stake if he/she would blindly put trades and await extreme events (fixing losses if nothing happens). So, prability matters but I would not hunt for extremely high prbability of success - in this case magnitude would be too small.
Consider this - on many social trading platforms only those who have high frequency of profitable trades, collect most of funds. You may have seen those accounts - trader fixes 10-15 pips profit (or even less) in every trade, while his drawdown is literally unlimited. Having his account balance growing (very slowly), he keeps permanent drawdown in equity of 400-500 pips - well, MT4 trading platform allows to have floating loss while having stable account balance (on futures trading platforms it's impossible). In othe words, such traders have limited, very limited upside and unlimited downside. This approach have risk of going bust once volatiliy or other market conditions change - and it happens from time to time. Currency market is range bound most of the time, but when it breaks out, it can produce volatile swings.

Top-performing traders are ok to have no more than 30-40% of profitable trades in their distribution, sometimes less. But their magnitude is relatively high, of course. They expect to get loss in a very next trade and they are ok with that fact. They know that overall results will be shown only on a series of trades.
You may be agree with everything above, but nevertheless it would be tough anyway to act upon those principles. According to Daniel Kahneman and his "prospective theory", it's much more comfortable to have frequent gains rather than big gains. Between two options trader (and any other person) would rather choose one that give short-term payoff (regardless of its size) rather than loss (but with greater possible payoff in case of profitable event). Loss produces 2,5 times more pain than satisfaction from profit. So, loss averse behavior pushes traders to have less upside than downside. That's a human nature. That's why there will be relatively small amount of successful traders.

Good luck!

2. the number of percentage of probability in forex trading is really high. a forex market is sometimes get really unpredictable and there probability and guess is then to be done. many newbies thinking is probability. though probability can be found in almost everything and in forex trading.

3. Big investors use probability technique in their trading but I personally say that we should not rely on bug gains as it makes you more greedy and you will be facing more risky situations. If you plan small trades that turn profitable are equal to one big profit. So why to put our live accounts in risk? It is better to win the race slow and steady instead of winning the game in one try.

4. Originally Posted by subhan04
Big investors use probability technique in their trading but I personally say that we should not rely on bug gains as it makes you more greedy and you will be facing more risky situations. If you plan small trades that turn profitable are equal to one big profit. So why to put our live accounts in risk? It is better to win the race slow and steady instead of winning the game in one try.
all traders in the market will use probability in their trade with their sehingag using a good probability that all depends on how they use their analysis tools in this trade so that they see with good analytical skills then it will be easier to find the probability of the trade This will make it so that they will be much more able to gain an advantage in trade

5. Originally Posted by forex619
the number of percentage of probability in forex trading is really high. a forex market is sometimes get really unpredictable and there probability and guess is then to be done. many newbies thinking is probability. though probability can be found in almost everything and in forex trading.
very difficult to guess and predict what is going to happen in the forex to le front either 1 minute or 1 hour ahead, we can only predict the movement of foreign exchange in many ways we speak, including can also use fundamental, technical or observation candle at any time to predict a price or movement in forex is, we still have a chance to win with all the

6. it is not about predicting the futureas it is exactly but all what we can do in forex market as trader is trying to anticipate what is most likely to happen because as you said no one no matter how experience in trading he has can predict what will happen exactly next

7. Originally Posted by subhan04
Big investors use probability technique in their trading but I personally say that we should not rely on bug gains as it makes you more greedy and you will be facing more risky situations. If you plan small trades that turn profitable are equal to one big profit. So why to put our live accounts in risk? It is better to win the race slow and steady instead of winning the game in one try.
i believe this is why the used of stop loss is important in this business regardless of how sure we might be with our trading analysis we ought to be prepared for the market as well becasue in Forex trading the market is allowed to act freely all the time and this is why we ought to be prepare for the worst in case things dont go the way we might have plan.

8. forex trading is a probability game where your position my become a loser just as easy as it may become a winner but our trading systems try to pull the law of probability in our favor so we may end up with at least more wins than losses at the end of a certain trading period

9. [lang=ar]If you want good thinking in the forex market should be thinking in the way of trading your own and also possible to think about your strategy and how to develop them in order to come to you the results of the profitable in the forex market and also must practice and learn well in the forex market and make thinking and enough time in training and education[/lang]

10. When a trader does his analysis and performs his trade there are many probabilities which needs to be considered by the trader and one needs to think what can happen and where can markets go from a particular point and what are probabilities of his trade going right or wrong as there are many factors that need to be considered by the trader . So one needs to consider all the factors and nothing can be ignored .

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