I'm developing a trading system and am attempting to determine the optimal time to enter a trade and ran into a bit of a conundrum. Advice/Comments appreciated!
Ps. sorry for the exaggerated thread title, I'm sure what I present here can be solved without being a "Math Master or Quant." It was just a cheap attempt at attracting views and hopefully an answer for my issue.
Part 1
So,
Let's say there's a trading method which has the following attributes:
The 1st Column: within "X" number of pips price always returned to a predetermined point (the predetermined point is determined of course by the trading system)
The second Column displays the percentage of times the event happened out of 1,000,000 occurrences (also called 1,000,000 trades later on)
"X" Pips
0 - 1 43% (means that price returned to the predetermined point within 0 - 1 pips 43% of 1,000,000 times)
1 - 2 14%
2 - 3 8%
3 - 4 5%
4 - 5 4%
5 - 6 2%
6 - 7 2%
7 - 8 1%
8 - 9 1%
9 - 30 pips 15% (means that price returned to the predetermined point within 9 - 30 pips 15% of 1,000,000 times)
By adding up the results one can say that within
0 - 30 pips 95% (Price will return 95% of the time within 30 pips to the determined point)
Part 2
Let's Say that we trade in a manner which does the following:
once price has moved "X" Pips (X pips shown in column 1 of course) we are trading Back to the predetermined point
we will win 95% of the time, the Amount of Pips Won is determined by How far from the Predetermined point we enter
when we lose we lose 30 pips and we lose 5% of the time.
So the at what point should we place our trade... to trade Back to the predetermined point?
Lets take a ratio of losers vs. winners to get a better idea....
30 pips lost * 5 percent chance of losing = 150
X pips won * 95 percent chance of winning = ?
We need to begin trading at an X value of atleast 1.57 (In other words by trading at 1.57 pips with a 95% winrate we end up at break even, assuming we use a 30 pip stoploss)....
Part 3 The Big Question
Since we know the pips to begin trading from should be atleast 1.57...
if we were to then take a greater X pip value to trade with while still applying the 95% winrate... we should have a winning system??
But... would we really have a 95% chance of winning if we take trades that have large "X" (pip) values? Consider the following:
If we trade using a pip value of 4 - 5 which has a 4% chance of returning to the predetermined point and we place our stoploss at 30 pips
we now have a method which trades less wayyyy less throughout the day than the 1.57 Breakeven method
So How often are we trading now?:
If we add the % of occurrence from column #2 for "4 - 5 pips" all the way to "9 - 30 pips" we get 25%... Meaning out of the 1 million occurrences in total we are ONLY trading 25% of the time. Since we are trading only 25% of the time how does this affect the winrate?
Is the following right???
Winners vs. Losers:
when we win, we get 5 pips * 25(percentage of the 1 million trades) = 125
when we lose, we lose 30 pips * 5(percent of the 1 million trades) = 150
150 - 125 = -25, meaning the system is a dud???
OR
Should I still be using the 95% chance of winning for trades that are entered at the 5 pip category (to be specific the "4 - 5 pip" category) when trying to figure out the end results of this method. Or perhaps something else???
I hope this isn't a major... pardon my language.... Brain Fart lol but either way I'd appreciate the help of the ForexFactory Community! Thanks everyone!
Ps. sorry for the exaggerated thread title, I'm sure what I present here can be solved without being a "Math Master or Quant." It was just a cheap attempt at attracting views and hopefully an answer for my issue.
Part 1
So,
Let's say there's a trading method which has the following attributes:
The 1st Column: within "X" number of pips price always returned to a predetermined point (the predetermined point is determined of course by the trading system)
The second Column displays the percentage of times the event happened out of 1,000,000 occurrences (also called 1,000,000 trades later on)
"X" Pips
0 - 1 43% (means that price returned to the predetermined point within 0 - 1 pips 43% of 1,000,000 times)
1 - 2 14%
2 - 3 8%
3 - 4 5%
4 - 5 4%
5 - 6 2%
6 - 7 2%
7 - 8 1%
8 - 9 1%
9 - 30 pips 15% (means that price returned to the predetermined point within 9 - 30 pips 15% of 1,000,000 times)
By adding up the results one can say that within
0 - 30 pips 95% (Price will return 95% of the time within 30 pips to the determined point)
Part 2
Let's Say that we trade in a manner which does the following:
once price has moved "X" Pips (X pips shown in column 1 of course) we are trading Back to the predetermined point
we will win 95% of the time, the Amount of Pips Won is determined by How far from the Predetermined point we enter
when we lose we lose 30 pips and we lose 5% of the time.
So the at what point should we place our trade... to trade Back to the predetermined point?
Lets take a ratio of losers vs. winners to get a better idea....
30 pips lost * 5 percent chance of losing = 150
X pips won * 95 percent chance of winning = ?
We need to begin trading at an X value of atleast 1.57 (In other words by trading at 1.57 pips with a 95% winrate we end up at break even, assuming we use a 30 pip stoploss)....
Part 3 The Big Question
Since we know the pips to begin trading from should be atleast 1.57...
if we were to then take a greater X pip value to trade with while still applying the 95% winrate... we should have a winning system??
But... would we really have a 95% chance of winning if we take trades that have large "X" (pip) values? Consider the following:
If we trade using a pip value of 4 - 5 which has a 4% chance of returning to the predetermined point and we place our stoploss at 30 pips
we now have a method which trades less wayyyy less throughout the day than the 1.57 Breakeven method
So How often are we trading now?:
If we add the % of occurrence from column #2 for "4 - 5 pips" all the way to "9 - 30 pips" we get 25%... Meaning out of the 1 million occurrences in total we are ONLY trading 25% of the time. Since we are trading only 25% of the time how does this affect the winrate?
Is the following right???
Winners vs. Losers:
when we win, we get 5 pips * 25(percentage of the 1 million trades) = 125
when we lose, we lose 30 pips * 5(percent of the 1 million trades) = 150
150 - 125 = -25, meaning the system is a dud???
OR
Should I still be using the 95% chance of winning for trades that are entered at the 5 pip category (to be specific the "4 - 5 pip" category) when trying to figure out the end results of this method. Or perhaps something else???
I hope this isn't a major... pardon my language.... Brain Fart lol but either way I'd appreciate the help of the ForexFactory Community! Thanks everyone!
A Positive Mind, and Positive Spirit lead to True Happiness