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 here

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. Correct? It'd be like flipping a coin. The TP and SL would have to be adjusted since you are closer to the SL as soon as you enter a trade. 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. 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.

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.

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. It's not pyramiding because you're not adding to trades when you're winning. It's more of the opposite. In fact I think it would be very unwise to trade with the pyramid strategy for winning trades, because as my numbers above show, the next consecutive winner, just like consecutive losers, is very unlikely and you're probably going to wipe away a lot of your profits when that loser hits.

There are two parts to the thread I think that should be discussed.

1. The doubling down strategy. With a risk:reward of 1:1 the system is very possible to use if you use very strict money management and understand that in the beginning money will be coming slowly, but it will be coming consistently. The strategy makes it seem as if there were no losing trades, remember? This is a law of large numbers system that requires you to be in the game for the long haul and not to make a quick buck to buy holiday gifts.

and

2. The strategy of the actual trading system. Equal profits and losses. Randomness. In the end how much does all of our research really increase our chances of success? The market only goes up or down. You can claim it goes sideways, but it really doesn't. Sideways movement still has pips up and down inside of it. So then how much validity is there in my assumptions that if we randomly place trades with equidistant TP and SL's that there is a 50/50 chance on each trade? And therefore, very limited possibilities of a random system having many consecutive losses.

I already have many ideas for how to trade this in my head. Yes, these ideas could be traded extremely easily by an EA. In fact since no indicators are required it could be an "always in" system traded very easily on a grid. I'd rather not start discussions about that yet.

Please just post about the topics already presented. Am I analyzing the market correctly? I'm sure plenty will bash me for presenting such ideas since doubling down is very risky and that the market is not necessarily random since technical analysis is a proven concept.

My response to those are that doubling down is risky. Does that mean someone with a $10,000 account can't institute this system when playing with pips valued at 1 cent and high leverage? I think they'd be able to afford to increase their lot size by 1028 times to make each pip worth $10.28. To get to 1028 their normal trading size would require 11 losing trades in a row. Imagine how unlikly that is.

And my response to the market not being random is the following. S/R is a proven concept. So are elliot waves. So are RSI crosses, channels, divergences, candles, head and shoulders, cup and handles, etc. etc.. The list goes on. The market is not random when we look at it in hindsight and know what tool to apply to see why it jumped 50 pips. Was it crossing the RSI, breaking through a previous resistance area, hitting a bottom channel? What tools the market follows are not constant and in that I claim the market is random. At least by it not following any one tool exactly then it is random and we can never tell where it will go. Why was this month a 15 year high on gbp/usd? How did it break through every previous resistance level in the past 14 years to get where its at now?

We're not in this business to predict and play the improbable. I doubt anyone here would have had the guts to enter a long trade in march of this year and hold out till these last two weeks. We would have packed up bags after bagging an easy 2000 pips several months ago and called it a year on gbp/usd. That is exactly what my idea for the system is about. I'm not here to predict every nook and cranny, retrace, peak, or valley. I'm trying to play the probable scenerios to bring in probable profits. Probability says a random, or even discretionary system is severely unlikely to lose 11 times in a row.

One thing I said on the original thread that rings true and cracked me up was:

Even if you were trying to be wrong you'd still probably win since the market wouldn't let you be 100% right about being wrong.

Think about all that and get back to me. Matt

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. Correct? It'd be like flipping a coin. The TP and SL would have to be adjusted since you are closer to the SL as soon as you enter a trade. 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. 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.

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.

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. It's not pyramiding because you're not adding to trades when you're winning. It's more of the opposite. In fact I think it would be very unwise to trade with the pyramid strategy for winning trades, because as my numbers above show, the next consecutive winner, just like consecutive losers, is very unlikely and you're probably going to wipe away a lot of your profits when that loser hits.

There are two parts to the thread I think that should be discussed.

1. The doubling down strategy. With a risk:reward of 1:1 the system is very possible to use if you use very strict money management and understand that in the beginning money will be coming slowly, but it will be coming consistently. The strategy makes it seem as if there were no losing trades, remember? This is a law of large numbers system that requires you to be in the game for the long haul and not to make a quick buck to buy holiday gifts.

and

2. The strategy of the actual trading system. Equal profits and losses. Randomness. In the end how much does all of our research really increase our chances of success? The market only goes up or down. You can claim it goes sideways, but it really doesn't. Sideways movement still has pips up and down inside of it. So then how much validity is there in my assumptions that if we randomly place trades with equidistant TP and SL's that there is a 50/50 chance on each trade? And therefore, very limited possibilities of a random system having many consecutive losses.

I already have many ideas for how to trade this in my head. Yes, these ideas could be traded extremely easily by an EA. In fact since no indicators are required it could be an "always in" system traded very easily on a grid. I'd rather not start discussions about that yet.

Please just post about the topics already presented. Am I analyzing the market correctly? I'm sure plenty will bash me for presenting such ideas since doubling down is very risky and that the market is not necessarily random since technical analysis is a proven concept.

My response to those are that doubling down is risky. Does that mean someone with a $10,000 account can't institute this system when playing with pips valued at 1 cent and high leverage? I think they'd be able to afford to increase their lot size by 1028 times to make each pip worth $10.28. To get to 1028 their normal trading size would require 11 losing trades in a row. Imagine how unlikly that is.

And my response to the market not being random is the following. S/R is a proven concept. So are elliot waves. So are RSI crosses, channels, divergences, candles, head and shoulders, cup and handles, etc. etc.. The list goes on. The market is not random when we look at it in hindsight and know what tool to apply to see why it jumped 50 pips. Was it crossing the RSI, breaking through a previous resistance area, hitting a bottom channel? What tools the market follows are not constant and in that I claim the market is random. At least by it not following any one tool exactly then it is random and we can never tell where it will go. Why was this month a 15 year high on gbp/usd? How did it break through every previous resistance level in the past 14 years to get where its at now?

We're not in this business to predict and play the improbable. I doubt anyone here would have had the guts to enter a long trade in march of this year and hold out till these last two weeks. We would have packed up bags after bagging an easy 2000 pips several months ago and called it a year on gbp/usd. That is exactly what my idea for the system is about. I'm not here to predict every nook and cranny, retrace, peak, or valley. I'm trying to play the probable scenerios to bring in probable profits. Probability says a random, or even discretionary system is severely unlikely to lose 11 times in a row.

One thing I said on the original thread that rings true and cracked me up was:

Even if you were trying to be wrong you'd still probably win since the market wouldn't let you be 100% right about being wrong.

Think about all that and get back to me. Matt