OK. Trading has been compared to gambling many times. Professional gamblers prefer to think in terms of probability and betting management.
So both have similarities. Both attract somewhat similar personalities. Although one is widely accepted internationally for trade reasons and can also be more of an intellectual pursuit as well.
Both entail "predicted expectation" (expectation of outcome) and "management of risk capital" to be consistently profitable over time.
Now that that preface is out of the way...
I discovered some results of a new EA I'm working on and it led me to think of another trading paradigm.
Profitable trading could be attained if one simply has higher statistical expectation of one of two possible events.
Some people say that the markets go up, down or sideways. To simply this, the markets go up or down. To make money on a single trade. You make money when the markets go up or down and keep your money if they stay exactly the same.
So the expected outcome of the market is either A or B.
And the expected result is either plus or minus.
So being profitable on a single trade simply means knowing where the market will go before the other.
For example, the market will go to A or B. You can simply this by saying that the market is either going to hit your stop level or your take profit. It's either/or. It will do one or the other, but not both on any given single trade.
A is your take profit, and B is your stop level. You just need to have confidence in which it will hit first.
Assuming you can afford for the market to hit your stop and still continue to trade, you still have a chance to continue to succeed as long as your A and B price points are statistically tradeable and financially manageable.
If you can predict with consistency, at which point A or B (your stop or your take profit) the market will hit first, and if you can still take a hit (a loss) or more than one consecutive hit and still have the capital to continue to trade the system, you will be profitable over time.
Still with me? Is that logic correct so far?
Knowing exactly which price the market will hit, either your stop or your take profit, all the time is difficult, yes.
However think of this scenario, I think you will agree the answers in these two very recent scenarios are "predictable".
The EURUSD closed on Friday at 1.3280
Where will the market go next? With that question you will have a thousand predictions and analysis.
Let's be more specific. Before we discuss predicting direction. Let's talk about price.
Which price will the market hit first: 132.40 OR 136.80 ?
Yes that last print is correct.
OK, obviously and statistically we would say that it will hit 132.40 before it hits 136.80.
We could be wrong, but we would be right more times by picking 132.40 in this scenario. Which is plus down 40 before it goes up to hit 400 pips up from here.
Without even talking about direction, by predicting that the market will hit 132.40 before 136.80 is saying that in the short to intermediate term based on this information, you would be short.
OK, what about the other way?
Friday's close was 132.80
Which do you think the market will hit first? 133.20 or 128.80 ?
Most would answer 133.20 which makes you a long position holder.
Both in this case would be statistically valid and have a positive expected outcome.
Those figures are arbitrary, but both are the opposite of the same ratio, based on recent historical EA testing. The SL to TP ratio can be anything to suit your style of trading.
Now, suppose you have a signal that gives you an accurate indication of direction over time (it doesn't matter how long it takes to go into your expected direction as long as it does before it goes to your expected stop out price).
Suppose your signal is generated 10 to 20 times a month with 80% accuracy. As long as you have wide enough stops and the capital to cover losses. You can expect a positive return value over X number of trades.
Finally with position pyramiding of profits, you could have a very respectable ROI.
So both have similarities. Both attract somewhat similar personalities. Although one is widely accepted internationally for trade reasons and can also be more of an intellectual pursuit as well.
Both entail "predicted expectation" (expectation of outcome) and "management of risk capital" to be consistently profitable over time.
Now that that preface is out of the way...
I discovered some results of a new EA I'm working on and it led me to think of another trading paradigm.
Profitable trading could be attained if one simply has higher statistical expectation of one of two possible events.
Some people say that the markets go up, down or sideways. To simply this, the markets go up or down. To make money on a single trade. You make money when the markets go up or down and keep your money if they stay exactly the same.
So the expected outcome of the market is either A or B.
And the expected result is either plus or minus.
So being profitable on a single trade simply means knowing where the market will go before the other.
For example, the market will go to A or B. You can simply this by saying that the market is either going to hit your stop level or your take profit. It's either/or. It will do one or the other, but not both on any given single trade.
A is your take profit, and B is your stop level. You just need to have confidence in which it will hit first.
Assuming you can afford for the market to hit your stop and still continue to trade, you still have a chance to continue to succeed as long as your A and B price points are statistically tradeable and financially manageable.
If you can predict with consistency, at which point A or B (your stop or your take profit) the market will hit first, and if you can still take a hit (a loss) or more than one consecutive hit and still have the capital to continue to trade the system, you will be profitable over time.
Still with me? Is that logic correct so far?
Knowing exactly which price the market will hit, either your stop or your take profit, all the time is difficult, yes.
However think of this scenario, I think you will agree the answers in these two very recent scenarios are "predictable".
The EURUSD closed on Friday at 1.3280
Where will the market go next? With that question you will have a thousand predictions and analysis.
Let's be more specific. Before we discuss predicting direction. Let's talk about price.
Which price will the market hit first: 132.40 OR 136.80 ?
Yes that last print is correct.
OK, obviously and statistically we would say that it will hit 132.40 before it hits 136.80.
We could be wrong, but we would be right more times by picking 132.40 in this scenario. Which is plus down 40 before it goes up to hit 400 pips up from here.
Without even talking about direction, by predicting that the market will hit 132.40 before 136.80 is saying that in the short to intermediate term based on this information, you would be short.
OK, what about the other way?
Friday's close was 132.80
Which do you think the market will hit first? 133.20 or 128.80 ?
Most would answer 133.20 which makes you a long position holder.
Both in this case would be statistically valid and have a positive expected outcome.
Those figures are arbitrary, but both are the opposite of the same ratio, based on recent historical EA testing. The SL to TP ratio can be anything to suit your style of trading.
Now, suppose you have a signal that gives you an accurate indication of direction over time (it doesn't matter how long it takes to go into your expected direction as long as it does before it goes to your expected stop out price).
Suppose your signal is generated 10 to 20 times a month with 80% accuracy. As long as you have wide enough stops and the capital to cover losses. You can expect a positive return value over X number of trades.
Finally with position pyramiding of profits, you could have a very respectable ROI.