Probability Theory And Forex
I feel I need to create this thread because the ideas it discusses are beginning to get off topic of the thread in which they were born. The original thread is located This thread is to discuss using mathematical probabilities to your advantage in a successful system. I'll try to make it simple to explain. If you have a system that utilizes a 100 TP and 100 SL it should have a 50/50 chance of winning if trades are entered at random over time. It'd be like flipping a coin.
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The TP and SL would have to be adjusted since you are closer to the SL as soon as you enter a trade. binary options brokers practice account But let's keep it simple theory for now. If we enter a trade that is equidistant from the SL and TP then there should be a 50% chance of being correct.
I will then assume that by actually looking at the general trend or market activities of a currency that we can give us a system that is more than 50% successful or at least 50% successful if my first assumption was incorrect. Does anyone disagree so far?
The probabilities haven't come into play yet though. I'm asking now what are the chances of a 50% correct system having consecutive losers? If I remember correctly from college we have a 50/50 chance on each trade to be right and wrong when we view them as independent events. When we try to find the probability of having 5 losing trades in a row, however, the chance of that happening is then:.5 X.5 X.5 X.5 X.5 =.03125 or 3.125%. Doesn't happen too often, although still very possible.
If our system is successful 60% of the time due to our simple chart reading predictions then the chance of having 5 losers would be 40%^5th power..4 X.4 X.4 X.4 X.4 =.010124 or 1.0124%. Still possible, although with some discretion we've effectively lowered the risk of losing 5 times in a row by a factor of 3. On the other thread, I was using a 100 SL and 50 TP to increase the success rate. The Risk:Reward was skewed to the losing side. I am starting this new thread with an equal risk vs reward to give us a 50/50 chance on each random trade. 90% binary options trading strategy. I wouldn't use a 1000 TP with 100 SL because the probability of getting a successful trade is very low and to use the following money management strategy would require too large a bank account to be reasonable. Here's the idea.
After a losing trade, double up on the next trade to cover the losses of the losing trade when you win this one. With a SL and TP that give us equal gains versus losses, doubling up on the winners allows us to cover the losses on the losers and still profit on the winning trade. So it would make it seem as if you had never taken the bad trade at all. Here are the probabilities of getting x amount of losers in a row in a 50% system: 2-.25 or 25% 3.125 or 12.5% 4.0625 or 6.25% 5-.03125 or 3.125% 6-.015625 or 1.5625% 7.0078125 or.78125% 8-.00390625 or.390625% 9-.001953125 or.1953125% 10 - A really small number This means out of 1000 trades you can expect to lose 9 times in a row 1.9 times. If your system hasn't provided enough profit after 1000 trades to survive that then you're trading the wrong system.
Probability Theory And Stochastic Processes
Now let's see what doubling up would require. Our value is 1 for your typical lot size per trade. To double up on consecutive trades to get to the next you would need to risk 1 - 2 - 4 - 8 - 16 - 32 - 64 - 128 - 256 - 512.
Probability Theory In Forex
This means if your typical trade size is 5 minilots then you need to trade: 5-10-20-40-80-160-320-640-1280.etc. So you can see that it adds up quickly and it would be very unwise to trade 5 minilots on a typical trade unless you have very high leverage as well as a large bank account. I would suggest trying the idea on micro micro lots first. I'm sure this idea of doubling down after losing trades has been discussed before, but I am not sure what it is generally referred to as. It's not martingale because it doesn't require you continue to fight with a losing trade. 85% success strategies binary options.
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