Successful Trading & Determining the Probability of a Trading System

Hi guys!

I'm relatively new to forex trading and have probably made every possible mistake there is to make in trading. I have been trying to establish a better trading strategy for the past few weeks and have been learning a lot of valuable information from the Forex Factory Forums.

There was another rather controversial thread here about determining probabilities of trading systems.

The most fascinating bit about that other thread was that someone had mentioned that regardless of the analysis that goes into a trading strategy, the ultimate probability of success of that strategy is still 50 / 50.

 

1. Without meaning to brew up more controversy, how do you guys measure probability objectively when starting out with a new system?
2. Is probability really just a buzz word that distracts us from profitability in the end (i.e. if we focus on building profitability rather than probability, will we have a better chance of succeeding in trading)?
3. What characteristics set a successful trader apart from an unsuccessful trader?
4. And perhaps most importantly, how does one maximise profitability in trading? What are the key components of a successful trading strategy?

Also, a number of other traders have mentioned that they trade with multiple brokers as a matter of course. Why is this beneficial? Do you feel it is an essential part of trading?

Many thanks in advance!

Jessa

I thought this was a good post and since no one answered I will give you my 2 cent worth.

F12 on Metatrader.
Meaning I pains takingly go back bar by bar and determine the winning % while at the same time forward testing. Even going bar by bar has a bit of error to it. Forward testing for a long -long -time is the best way.

Now this hard to do for a discretionary system, for me anyway, because you never know what you would have done at that point in time. It's easy to look back and say "I would have done this...", but you never really know.


For me, in the Forex market it is everything.
My profitability is based on my probability and payoff, thus I am able to determine my EV.
After thousands of iterations I hit about 53%, but I error on the side of caution and just say 50%.
My risk is 2% for a gain of 2.5%, so for every win coupled with a loss I am up .5%.
So my +EV is .25% for every trade, no matter if it wins or loses.

Now all this comes with some caveats and which leads in to your next question.
My SL's and TP's are not "technically" correct alot of the times. I am out of trades when I know technically I should still be in them.
I have open trades at times that I know stand little chance of becoming profitable; but I knew going in that these types of things were going to happen. So they don't bother me, it's part of the way I chose to play the game.
So the trades themselves are not always "maximal" so to speak.

However the "way" I trade is "maximal" for me and that is more important.


All decisions and trades are made for me atuomatically, I'm not bashing myslef over bad trades or having "what was I thinking?" type moments.
Nor do I feel I'm really "knowledgeable" in this market and really don't have a desire to feel like I have a clue. It keeps me open to change when and if the time comes.
I just review the charts\trades to check executions- and how the system dealt with market conditions. I just play the odds and as long as they keep paying me I'll keep playing.


In the futures market my trading style is completely different.
I have other tools to my disposal -volume, tape print; Which in turn makes every situation so uniquely different in my eyes.
I give it my full attention and I personally can not just do it mechanically.

I did not want to give this market my full attention so to speak and that is the most rewarding aspect of it. Kind of like playing "Name That Tune" but playing against myself to push myself more.

So while my profitablity in $'s may not be maximized, the profitablity in:

1. How I spend my time
2. The challenges I set for myself
3. Things I've learned that I can apply in other areas of life

far outweigh any $ amount.

Most everything I have accomplished(outside the world of trading) up until this point would have not happened without using some form of probabilities.

I thought the following was a good read.
http://forexfactory.com/showthread.p...34#post1683534

regards.

My opinion is that the best way to measure probability objectively when starting out with a new system is to test the system in a way that does not allow the system to be over optimized or curve fitted to past market conditions as hind site is 20/20.

One of the most basic things to do here is to come up with an idea and then have two blocks of data that you test that idea on, one that you run the original test on and look for legitimate ways to optimize and then one that you forward test the data on once the system is finished.

On the second question I don't think that probability is just a buzzword however I do think that traders often focus too much of their attention here and not enough on money management.


here are a few:

Hard work and a willingness to spend a lot of time learning their craft
Intelligence
Ability to keep things simple
Willingness to take losses
Patience in down times
see each trade as the starting point
discipline


Realize that picking your entry points is only part of the game the biggest part is money management.

Because the foreign exchange market is an over the counter market the execution and pricing that you will get varies depending on the broker that you trade with. Some provide superior execution and pricing as a matter of course, some will be better when trading around news or in volitile markets etc.

Secondly because the FX market is over the counter your funds are not protected in the event of bankruptcy of a firm (UK firms are an exception to this) so many traders hold multiple accounts to avoid having all their eggs in one basket.

Hope that helps.

Dave

In my experience there are many things to take into account to be successful as a trader.

First is to sort out your mindset. Big subject for some, but you need to re-programme your mind so you can trade unencumbered by your negative subconscious programming.

Second is not to get too involved in educating yourself into hundreds of different ways of doing things, especially if the best you can find is only offering you 50/50.

Third, don't take on all the limiting beliefs that the Forex environment is awash with. There's no reason why you cannot trade with a high percentage of winning trades.

Fourth, find a simple and effective method, and then master it for yourself. If you spend too much time listening to others or looking for a mentor, you'll never be in control of your own trading, and you will buy into the failures of the mindsets of others.

Fifth, be careful of the systems that others develop. They may not be perfect (a person designed them after all), while they work for the designer they may not work for you as you can never have the same degree of understanding of it as the person who designed it. Also, many systems work for a while and then fail. There are reasons for this that I can show you, but not in a thread like this. It's better to have a live interaction like one of my webcasts.

Sixth, set your own standards, but beware of setting goals. Goal-setting is a trendy thing to do, but if you occasionally fall short of your target this can have a negative impact on your trades because it affects your mindset and increases tension. It's not a good idea to trade at all under these conditions, and any way, you may not be reaching your target simply because the system you are using doesn't always see a trading opportunity just when you want it to appear.

Seventh, be gentle with yourself, get exercise, communicate with people outside the computer (you know, in real life!), do what's good for you. Then, you can trade in a good frame of mind, and have a life as well!

Good luck!

Thanks a lot, Prime#, fxtrader1979, and NiceGuy777!

You have all provided very good advice and I really do appreciate it.

I learned a lot trading this week and gained a lot of perspective as to what I was doing wrong and what I was doing right. I looked at my trade journal and noticed that I'd made over 1,000 trades with a 90% win rate - and was still losing a lot of money - almost all my trading capital is gone. My losses were too big and my profitable trades were too small.

I hope that by sharing some of my mistakes here, maybe someone will also have a revelation that will save them a lot in tuition!

Although finding some of the answers leads to new questions, I'm a lot better off this week than I was last week. Like you all have mentioned, trading psychology has a large impact on success and I'm glad I was able to sidestep some of the issues that were holding me back in trading.

I noticed the positive synergies of money management, fundamental analysis, technical analysis, and trading psychology all coming together. If you get all of these aspects right, then you greatly improve your chance of success - increasing the probability and profitability of your trading system. This is quite simple in hindsight, but that may not be as evident when emotion overtakes logic in one's trading.

What I didn't understand about money management was that you can cut down your risk by either placing really tight stops or downsizing your lot size - or even doing both. If you're doubtful about a trade, it's better to stay out of it.

Timing and getting the timing right plays a very critical role as well. We hear so many traders lamenting that they were stopped out of a trade that then started moving back in their direction. Part of the reason I didn't get some of my trades right was that I was trading during the wrong times. I noticed that trading a currency pair that is relatively inactive for my time zone was a big mistake. Not taking advantage of news announcements or not being aware of when news announcements are can also be costly.

Technical analysis helps us to quantify risks and rewards; news announcements drive price movements; defining stops and lot sizes helps risk management; and trading with the right frame of mind ensures that you're giving yourself the best chance of maximising a trade's fullest potential.

I know I'm still a long way from being a successful trader, but I'm really happy that you guys have provided so many thoughts for bringing me one step closer.

Many thanks again and happy trading!!

It's good to see you are making progress. Congratulations!

Hi NiceGuy!

How are you doing?

Thanks for your PM. I don't have PM posting privileges just yet, but thank you so much for your invite.

I'd love to attend one of your Web casts. When is the next one?

Thanks again and all the best,

Jessa

It's tomorrow at 7.00pm PST. Send me an email at [email protected] if you want to join in.

This is an excellent thread. I'm not sure I can add anything practically beyond the much great advice already given, except to say more pointedly: beware of "experts". I'm not sure there's ever been a line of business (or walk of life) with as many people so certain of their expertise, when they truly don't have a clue what they are saying.

There is something to be said for developing a level of subjective observational skill, such as what Prime talks about in his futures trading. That's how I trade news, and I could most likely never create a system that does what I can do by observation in real time. For the most part though, you need to be able to zero in on the characteristics of a specific instrument, and doing so (apart from subjective interpretation already mentioned) is accomplished with measurement tools of some kind. Yet... you will find threads here at FF with people talking about the utter uselessness of "technical analysis" (call it what you will). So I guess I would say, test all things, in adding to the warning you've already been given re: beware of other folks' systems. Take care.

Great advice from everyone above..

Now at a practical level..One suggestion...when you´ve decided on your system.. or even if you justa wVnt to test out an option, acelerate your learning curve..with a simulator. .. especially if its a long T/F system. Eyeballing charts and running rulebased Eas wont do what this does.

There are commercial ones available but this is free.

http://www.forexfactory.com/showthread.php?t=60849

vHandsTrade is clunkey but given the constraints of the MQ4 tester.. Its a brilliant piece of programming...once mastered its a great tester of both system and trader. any system.
Blueruby has done a great job in this thread to help you get started with it.
Now you can trade a year+ any Saturday afternoon...LoL
Good questions.. Hope this helps.

In trading the probability of a successful trade is normally between 40%-60%. It depends on different market conditions and timing or trades. We can be successful with 40% of our trades and make lots of money as long as we manage them correctly.