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Thinking in a probabilistic way

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  • First Post: Edited Aug 5, 2020 5:50am Aug 4, 2020 10:36pm | Edited Aug 5, 2020 5:50am
As the title says, it's known that as traders we must learn to think in the markets in a probabilistic way, but every time I keep finding some questions that seems to block my mind.

It may seem as a stupid question, but...

Let me make an example:

Let's say I have found three levels in which I've found an edge to make entries with it's given exits...
If I entry one day using one of these entries and use another one for the entry on the next day and keep mixing my entries, how would be that supposed to affect my results? Could it increase the drawdown time of each method or of the system as a whole?

Cheers,
the statistics is based on a finite number of cases and the probability is based on an infinite number of cases, so even 70% probability can begin with huge series of losses...
BN
Quoting lonetraderBR
As the title says, it's known that as traders we must learn to think in the markets in a probabilistic way, but every time I keep finding some questions that seems to block my mind. It may seem as a stupid question, but... Let me make an example: Let's say I have found three levels in which I've found an edge to make entries with it's given exits... If I entry one day using one of these entries and use another one for the entry on the next day and keep mixing my entries, how iwould be that supposed to affect my results? Could it increase the drawdown...
it's hard to say. you gotta program a kind of automated system to really know
Quoting BlackNapkins
the statistics is based on a finite number of cases and the probability is based on an infinite number of cases, so even 70% probability can begin with huge series of losses...
This is what I find tricky. Making an analogy to the game theory, it's said that we should keep betting as long as we have an edge... But what confuses me is: could I keep choosing my entries using discretion (with all of them having a proven edge) to try to fit better with the given situations of the market, or should I have to execute each edge individually each time it presents to get its outcomes.
Probabilistic thinking is essentially trying to estimate, using some tools of math and logic, the likelihood of any specific outcome coming to pass. In a world where each moment is determined by an infinitely complex set of factors, probabilistic thinking helps us identify the most likely outcomes.
Quoting lonetraderBR
As the title says, it's known that as traders we must learn to think in the markets in a probabilistic way, but every time I keep finding some questions that seems to block my mind. It may seem as a stupid question, but... Let me make an example: Let's say I have found three levels in which I've found an edge to make entries with it's given exits... If I entry one day using one of these entries and use another one for the entry on the next day and keep mixing my entries, how would be that supposed to affect my results? Could it increase the drawdown...
Hi lonetraderBR,

Sounds like you have 3 independent events, eg. entry 1 + exit 1, entry 2 + exit 2 and entry 3 + exit 3.

Have you considered to look at them individually? An example that comes to mind with 3 lines are pivots, where each line could be an entry.

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Just for an example, one could look at the probability of taking a reversal trade from a pivot level. Each could be treated as independent events, and could all be part of a system. Something interesting to notice is that there is no chance for overlapping entries in the same day on how I have defined the events in this example. But there can be another chance for extra positions to overlap the next day(s) if the right price action occurs. That means there is some potential for correlation between the entries.

For this example though, there is a probability even before the entry. It is the probability of price first reaching that level S1, S2 .etc

So in short: Try to approach each entry + exit combo as a unique event and see how much they correlate. That should give you a better idea of the drawdown if 2 or more correlated conditions experience run of losses at the same time.

Hope this helps ^_^
"Only you can Make the Future you will be proud to be a part of..." -Me
Quoting tzamo
{quote} Hi lonetraderBR, Sounds like you have 3 independent events, eg. entry 1 + exit 1, entry 2 + exit 2 and entry 3 + exit 3. Have you considered to look at them individually? An example that comes to mind with 3 lines are pivots, where each line could be an entry. {image} Just for an example, one could look at the probability of taking a reversal trade from a pivot level. Each could be treated as independent events, and could all be part of a system. Something interesting to notice is that there is no chance for overlapping entries in the same...
Thanks for the answer, tzamo = )

Indeed, the examples with pivots is similar to what I do.
I've been tracking the outcomes of each of the 3 different entries daily (with the same method of exits) . The main problem to me is that I find myself many times thinking like "I should have used that level instead of this one" and then the emotions come to play and make me feel pain when I get a loss in my entry and the other entries would have been winners.

I'm not so sophisticated with statistics but I created an Excel sheet to generate scenarios picking randomly between the 3 entries each day, by doing that, it seems that it shouldn't matter which entry I use, as long as I keep trading them until I get a big enough sample so the results would appear. But... as I said, the emotional responses are my big strugle. It seems like I always pick the wrong ones, making the drawdowns of the method worse than they "should be"
Quoting lonetraderBR
{quote} Thanks for the answer, tzamo = ) Indeed, the examples with pivots is similar to what I do. I've been tracking the outcomes of each of the 3 different entries daily (with the same method of exits) . The main problem to me is that I find myself many times thinking like "I should have used that level instead of this one" and then the emotions come to play and make me feel pain when I get a loss in my entry and the other entries would have been winners. I'm not so sophisticated with statistics but I created an Excel sheet to generate scenarios...
You are welcome

When you start thinking of using one over the other, are the outcomes on average better for the one that wasn't used?

If it is a case of: wait for X or Y level/ price action to happen and execute which ever occurs first for Zpips profit within this trading window. Then maybe have to accept that one will occur first. What you can do in such a situation is write out a set of systematic rules/ guidelines to follow which should help with the emotions.

Since you mentioned it is possible to get 2 at a time, you can also have a look what happens if you cut your risk by 50% and execute on 2 of the signals from the levels (eg. instead of 1 lot per trade, use 0.5 lots and enter on 2 of the 3 levels).
This also makes some sense in terms of stats that if you pick 1/3 = 33% chance to select the best, while 2/3= 66% chance that you picked the best entry.

Best of luck with your levels
"Only you can Make the Future you will be proud to be a part of..." -Me
Quoting tzamo
{quote} You are welcome When you start thinking of using one over the other, are the outcomes on average better for the one that wasn't used? If it is a case of: wait for X or Y level/ price action to happen and execute which ever occurs first for Zpips profit within this trading window. Then maybe have to accept that one will occur first. What you can do in such a situation is write out a set of systematic rules/ guidelines to follow which should help with the emotions. Since you mentioned it is possible to get 2 at a time, you can also...
Thanks, tzamo!

Sometimes I really feel that I improve my results by choosing the entry of the day between the ones that are available. But in other times it feels like I am also increasing the drawdown periods of the method.Sometimes I think that maybe the best thing to do could be to select one of the levels and trade just it. But this way, I would have entries only in about 60% of the days. *I forgot to say that I only make one entry per day (this was a way that I found to overcome overtrading when I get losses).

And yes, sometimes the levels are close and I try to choose the one that makes more sense using some discretion. But sometimes I skip one also because of some discretion (e.g. if I think that the level was not really broken).

I know that the discretion is the trickiest part for the emotions because I think I will always need to deal with this sensation of "I should have traded that level today"... I hope that with time, and confidence in my method, I can overcome these obstacles.

Ps.: sorry for some english mistakes, I lived in US for some months, but I'm still trying to improve it


Cheers = )
  • Post #10
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  • Last Post: Aug 16, 2020 11:51am Aug 16, 2020 11:51am
Of course, there is always a probability, especially if several levels are nearby or the market is formed as actively as possible on that day. And of course we risk every time we decide that we will work today. But you know, this is what helps us to find certain regularities and learn how to act in the most profitable way, etc.
If you feel that you are constantly doubting and have not yet found the strategy that has given you the most accurate understanding of the market, you just need to experiment a little bit more and keep more detailed statistics that will help you to classify such moments. And of course you shouldn't do all this with your money, try to work a little bit more on the demo, so you can take a chance and see in which situations it is most justified.
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