Nature of Markets – Randomness & Probability

[Anti]

Good to see that you’ve success, @George. Could you please upload a video to show that?!

[CSendo]

I would be interested to see too. I fail to comprehend how understand how anticipating moves to the tick is still not satisfactory… if I could predict moves even within 10 pips I would be gone in my i8 

[smallcat]

Saver0 wrote:

Hi all! A lot has happened in my absence from this community. There were some family things that happened but things has finally returned to “normal” and I’m finding more time to continue my research where I left off. I hope to share my findings with you here and help you all along the way. Continuing from where I left off.. ———————————————- My first goal was to observe the market and understand it’s nature. I have been able to successfully conclude as we would expect, a randomly placed trade would have a random outcome. This means if you randomly place a long or short trade, you would expect to have 50% probability of success (if we exclude the spread/commission). My second goal is to harness the power of money management to increase the odds of winning. Where odds of winning is the net % gain of the account balance. One of the simplest ways to grow your account steadily is to make sure that you are risking/gaining a fixed percentage of account balance rather than a fixed dollar amount. Let’s take a look at the following 2 charts. These are the simulated account balance from a trading system with 56% win rate. The top chart you will see how the account balance grew when on a successful trade a profit of 0.5% was taken and on a losing trade a -0.6% loss was taken. This translated to $5 TP and $6 SL. If I traded a fixed TP and SL $ amount then I would have ended up with about 350% gain. However, if I adjusted size of each new trade, then I would have had 1,200% gain. Even though the win rate of each trade was only 56%, with proper compounding based money management, you can have really good gains. Let me ask a question.. have you ever wondered if there were patterns in the market with high recurrence?

Very interesting @saver0, thanks for this   One question: At your example, “translating” of percentage to fixed money amount ($5 TP & $6 SL in this example), is it including the Commission, Spread, Swap, etc ?

[George]

Sure, I can make some video. But it can take days. At least for now. Because it’s quite hard to be so accurate on one chart I can’t do more then one. Or maybe I can but I hate that.. Seriously. :/ So I will do my best and will share something. At least I can take it as practice. :)

 

// I watch EUR/USD for now.

• This reply was modified 9 years, 9 months ago by George.

[George]

Ok guys, here are some support resistance lines. I will explain later, after some move. Btw vertical lines means place where price should reverse. But it works only if market is not in trend. We need good sideway moves. :) Ah, S/R lines should be traded on tick charts (or 1 minute at least). This way you can eliminate wrong sup/res. I have no other way of doing it sadly. Trying to achieve that for years. Still no luck tho. :( My only problem is this I would say.

 

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[Anti]

@Saver0: If you’d have more time I’d be happy to read more from you – for instance on the prizes with higher recurrence than others …

[George]

New levels for EUR/USD. Made today. Should be very accurate. (More accurate then before tbh) Last time I used only one TF. I admit I have still mess in TF’s. :'( Need to fix it somehow ASAP.

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[Billyon]

This was a great discussion and please continue.

 

[Saver0]

Hi all!

I started playing around with probabilities once again  I’m wondering if someone could verify if my probability calculations are correct.

This is what I want to find out:

What is the probability of price going up 40 pips given that it has already gone up 20 pips first before going down 20 pips.

I’m observing EURUSD for this experiment using H4 bars open as the simulated entry and using M5 to see exactly if the price went up 20 pips or down 20 pips from the starting point.

Here are the numbers I have:

Total that went up 40 pips instead of down: 14894
Total that went down 40 pips instead of up: 11958
This yields a probability of 55% of success if one is to open a long trade on every H4 bar open (this just implies that EURUSD generall had a long bias since 1999)

Total that went up 20 pips first and then went up 40 pips from the bar open: 11136
Total that went up 20 pips first and then went down 40 pips from the bar open: 2708
Total that went down 20 pips first and then went up 40 pips from the bar open: 3758
Total that went down 20 pips first and then went down 40 pips from the bar open: 9250

Total that went up 20 pips first: 13844
Total that went down 20 pips first: 13008

I was looking into conditional probability for this: https://www.mathsisfun.com/data/probability-events-conditional.html

So the P(going up 40 pips | given that it already went up 20) = P(going up 40 pips having gone up 20 pips first) / P(going up 20 pips)
Does this seems accurate?

P(going up 40 pips having gone up 20 pips first) = 11136 / (11136+2708+3758+9250) = 0.415
P(going up 20 pips) = 13844/(13844+13008) = 0.516

So the P(going up 40 pips | given that it already went up 20) =  0.415 / 0.516 = 0.80 = 80%

If someone could verify the above probability calculation is correct, it would be really appreciated.

If this is correct, then that means we should add to a winning trade and exit out of a loosing trade. The above probability means, when we take a trade for any direction, there is maybe ~50% probability of it going any direction (ignoring any indicators) 40pips. Let’s say we took a long trade and we observed that it went up 20pips, this means now the probability of it going 20 pips more is 80% so it would make sense to place another trade for the same 40pips TP level. However, it gets a bit interesting, this new trade, it now has 50% probability of going down 40 pips as well because its an independent event.. however, probability of it going up 20 pips vs 40pips down should be around 80% from my previous calculations (needs to be verified again). When the second trade is taking at the 20pip level from the open (when in profit of 20pips), this second trade has 50% chance of going up 20pips or down 20pips. Going down 20pips is a break even trade because you can close both trades at a zero loss (ignoring spread/commission) . But the upside is higher because higher chance the first trade will reach the profit and if it does then both trades are in the profit.

Somehow in my head, this doesn’t make sense.. see if it makes sense for anyone. Probabilities sure are interesting 

Focus, Patience, Determination & Order in chaos

[Saver0]

Oh, almost forgot! Here is my node.js script if anyone is interested in playing around 

You need to have Node.js installed in your system.
Run npm install to install the needed packages.
Then run the command node simple_probability.js in the directory.
I added some comments to the top. First you will need a data export from MT4 or EURUSD M5 data. You will need to uncomment the first section to generate the .json files. I did some formatting and saving it as JSON so its faster to load. The files are too big for attaching.

If you don’t know the basics of Node.js, learn it! It’s fun and easy. Have fun!

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Focus, Patience, Determination & Order in chaos

[Anti]

Hi Saver0. Just a short comment on your probability statement (atm I’m busy with my day job). I don’t think that it is correct. You should use the Bayes theorem in order to calculate the conditional probability, which in your case would be:

P(40 pips rise | 20 pips rise and 20 pips fall afterwards) = [ P(20 pips rise and 20 pips fall afterwards | 40 pips rise) * P(40 pips rise) ] / P(20 pips rise and 20 pips fall afterwards)

[Author]

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