Risk is not the same as probability | Forex Factory

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Risk is not the same as probability

  • #1
  • First Post: Sep 30, 2017 3:52pm Sep 30, 2017 3:52pm
I observed, that many new forex traders think that risk is very similar or identical to probability.
Nothing more wrong, at least according to my experience.

Looking on trades probability just as on the roll of a dice seems to be a misunderstanding. Rolling a dice is (in principle) random. But forex is more unpredictable, rather than random.
Let's take a look on the probability distribution of an ideal rolling of ideal dice. For a large number of rollings, each result (1..6), will be picked almost the same number of times.
But on forex changes are not random. Small changes are a result of huge number of unpredictable factors. Big moves are a result of small number of more predictable factors.

Basing on what are your strategy assumptions, some particular move may be less probable, even when it is not many pips away, and opposite move may be more probable, even if it is far away from the start.

So if it is not, than You cannot look only on a risk-reward ratio. More accurate would be Profitability calculated this way:

Pf = (Reward * probability of Reward) / (risk * probability of a risk)

Example:
risk = 100 pips;
Reward = 30 pips;
risk_probability = 0.10;
Reward_probability = 0.90;

Reward/risk = 0.5 but profitability Pf = 2.7 // values significantly higher than one gives better opportunities to trades

The more it is over 1 the more profitable your strategy is.
This kind of weighted RR ratio is one of the keys to profitable trading in a long term!

The question however is how to find out what is the probability of a risk or a reward.
How to calculate it?
Is it possible?

I would like to hear from You guys what is Your opinion on this topic.
Also I have a lot of knowledge and observations that I would like to share, so I am looking forward to get some interesting posts from You.

Cheers!
  • #2
  • Oct 3, 2017 10:43am Oct 3, 2017 10:43am
Look, you only place a trade when your trading edge is present on the charts. If your trading edge isnt present, you'd be risking blowing your account to bits.
Price Action Tips For Aspiring Forex Traders
  • #3
  • Oct 3, 2017 8:58pm Oct 3, 2017 8:58pm
Quoting marecki
I observed, that many new forex traders think that risk is very similar or identical to probability. Nothing more wrong, at least according to my experience. Looking on trades probability just as on the roll of a dice seems to be a misunderstanding. Rolling a dice is (in principle) random. But forex is more unpredictable, rather than random. Let's take a look on the probability distribution of an ideal rolling of ideal dice. For a large number of rollings, each result (1..6), will be picked almost the same number of times. But on forex changes are...
Hi there.
You are actually trying to combine two opposite things.
Risk to reward ratio is nothing more then how much you can afford to lose to how much you target to get.
Probability of your trades is only up to you.
The more R:R of your trades is the less probability you can "afford" to stay BE.
As of your example:
Your R:R is 10:3 or around 33.33....% wich in turn will force you to get win rate of 78% just to be slightly positive in over words you need to win 78 trades out of 100... And if you think about this in terms of time...plus don't forget about psychological aspect-you will wipe off your recent 3 profits taken by only one SL.
High R:R with acceptable win rate is better than very low R:R with high win rate by psychological and mathematical measures.
  • #4
  • Oct 4, 2017 11:47am Oct 4, 2017 11:47am
Quoting kaymeis
Look, you only place a trade when your trading edge is present on the charts. If your trading edge isnt present, you'd be risking blowing your account to bits.
Hi Kaymeis!
Nice view, but how exactly would You describe someone's "trading edge".
Of course I agree with you opinion, but I'm not really sure if I understand what exacly you mean by trading edge.

Cheers!
  • #5
  • Oct 4, 2017 12:58pm Oct 4, 2017 12:58pm
If we estimate loss per trade , could be useful. As a example , how much loss can we make a day. We have to fix loss first. Let probability of profit fortified.
  • #6
  • Oct 4, 2017 12:59pm Oct 4, 2017 12:59pm
Quoting marecki
{quote} Hi Kaymeis! Nice view, but how exactly would You describe someone's "trading edge". Of course I agree with you opinion, but I'm not really sure if I understand what exacly you mean by trading edge. Cheers!
I think it's about how confident your assumptions is.
Discipline-confidence-trading plan-money management.
Some people say that a "loser" system with low win rate but with good MM can still be profitable... But don't forget about time you investing in trading..if you are chained to your PC all days struggling to make 100-200 pips in a month... Well for me it's not worth it...You can find or earn another money but you will never be able to "earn" your wasted time.ROI% is all that matters at the end of the day.
  • #7
  • Edited 4:45pm Oct 4, 2017 4:05pm | Edited 4:45pm
Quoting G.Kad
{quote} Hi there. You are actually trying to combine two opposite things. Risk to reward ratio is nothing more then how much you can afford to lose to how much you target to get. Probability of your trades is only up to you. The more R:R of your trades is the less probability you can "afford" to stay BE. As of your example: Your R:R is 10:3 or around 33.33....% wich in turn will force you to get win rate of 78% just to be slightly positive in over words you need to win 78 trades out of 100... And if you think about this in terms of time...plus don't...
Hi G.KAD!.
Thanks for interesting reply.
That is a lot of true: I am combining in it two different things, maybe not that opposite.
I still agree that when risk/Reward=100/30 than I need much more winning trades than loosing ones, same as You said one SL will completely wipe out my 3 TPs. Agree!
Let's leave now the psychology influence on our winning rate for a moment.
What I am saying is that many of traders treat R:R as the main determinant of winrate, i.e. the more is Reward in comparison to risk the more winning the whole strategy is.
This seems to me completely wrong.

In my opinion if we'll think about some areas of each chart where price will go more or less likely,
and if we can skillfully determine such areas,
then we can actually make trades with high possibility of win, almost independently of risk:Reward ratio.

I wouldn't also tell myself that the probability is up to me, or up to any other trader. It's more determined by such factors like:

  1. type of strategy or strategies
  2. way of using the strategies (starting, setting, FINISHING)
  3. not to short distances of SLs (so it will not be hit by some "false moves" or "noise moves")
  4. not too long distances of TPs (so a move we are expecting can be long enough to reach it )

I like Your last statement:

High R:R with acceptable win rate is better than very low R:R with high win rate by psychological and mathematical measures.

I'll think about that..

  • #8
  • Oct 4, 2017 4:48pm Oct 4, 2017 4:48pm
Quoting marecki
{quote} In my opinion if we'll think about some areas of each chart where price will go more or less likely, and if we can skillfully determine such areas, then we can actually make trades with high possibility of win, almost independently of risk:Reward ratio. I wouldn't also tell myself that the probability is up to me, or up to any other trader. It's more determined by such factors like: type of strategy or s....
You see, now you are talking about some kind of a trading plan,not in terms of winning 76 out of 100 trades but about probability of "this" concrete trade you want to get in...and ask yourself this-"OK, I think it's high probability of this sell trade to hit my 30 pip target, do I really need my stop to be 100pips on this trade?I see there is last swing high at about 20pips and if it will break there is a higher chance for my 100pip stop to be hit... So maybe I am better to take my stop slightly up that swing high in case of whipsow? " Just an example... I am a newbie... But I think that's right
  • #9
  • Oct 6, 2017 5:18am Oct 6, 2017 5:18am
Risk management and money management is needed to survive in the Forex Trading, you need to understand that if you wanna become successful in the Forex Trading, you need a lot of things to learn.
  • #10
  • Oct 7, 2017 4:42pm Oct 7, 2017 4:42pm
Quoting johnston
If we estimate loss per trade , could be useful. As a example , how much loss can we make a day. We have to fix loss first. Let probability of profit fortified.
I think this a good narration in my opinion however we can also use stop loss as well to cut off our losses in start rather than loosing up the entire money.
  • #11
  • Last Post: Oct 10, 2017 12:50pm Oct 10, 2017 12:50pm
Quoting johnston
If we estimate loss per trade , could be useful. As a example , how much loss can we make a day. We have to fix loss first. Let probability of profit fortified.
Good suggestion but estimate loss per day is really difficult to predict, because the loss occurs according to markets movements and we can’t predict the real faction of this market with certainly at all.
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