WaveRider
Master Sergeant
- Messages
- 350
Forex shouldn't be like gambling, but remember some people gamble for a living and make a lot of money doing it. So how to improve your game?
Here is some sobering math about your account, and some advice to stay solvent.
Assuming you had a fair 50/50 chance of winning all your trades or getting the stop loss hit:
Q: How likely are you to have a 7 trade losing streak?
A: Very likely. In 100 trades, the odds you will have 7 consecutive losers is 17.23%.
100 trades can be a day or two for the over-traders, or few weeks for a typical EA, or a year or two for the pros. (I doubt many successful manual traders trade that many times per year.) As the total number of trades goes up, this percentage goes up exponentially.
source: Probability - Coins - Ask the Wizard - Wizard of Odds
The chances of NOT getting a 6 trade streak, win or loss, in 200 trades is only 3.47%, assuming they were all 50/50 trades.
source: http://wizardofodds.com/image/ask-the-wizard/streaks.pdf
Theoretically that could be 7 losses out of the first 7 trades. That's not likely but you could hit the lottery and lose everything. Many have lost everything in a lot fewer than 7 trades.
Can your trading plan take a 7 trade loss streak and you still have the funds (and heart) to trade?
TIP 1: Trade small relative to account size.
Every successful professional trader can take 7 losses in a row. More even. One successful trader said he traded so small it would have been nearly impossible to bust the account. (Nice when you're that well funded.)A 25% draw down can happen to a well respected and overall very successful trader. You are very unlikely to have 11 or 12 losses in a row so make trade sizes small enough to put you in that bracket of safety. On the other hand, a losing streak of 5 or 6 over a relatively short career is near 100% certain, thus the title of the article.
Tip 2: To improve the odds, get into a trend.
Stay out of low probability time periods. In black jack, staying out when the odds are against you is called wonging, named after Stanford Wong a.k.a. John Fergusson. A wonger will watch the table, counting cards but not playing, during the low and negative count. He'll jump in when the count is high, meaning the likelihood of having a face card is very high. This drastically changes the house advantage to being a player advantage. He steps out of the game again when the count is low because the house has the advantage. This is how the MIT teams (there were more than one) made boat loads as depicted in the movie "21". They had team mates watch several tables and the wonger came in and made a ton of money on the hottest one.
In blackjack, if the player is playing perfectly and with standard Vegas rules, the house advantage is only about 0.5%, about the best in all of gambling. But math doesn't lie and this 0.5% makes buckets of dough for casino. It's compound winnings. But if the player stays out during the statistically bad times, he's evaded the rules of probability, basically letting the other players on the table eat the low odds time periods. He will always have a much higher chance of winning and compounding the winnings.
How does a Forex trader wong the market? Stay out until there is statistically higher probability of success. Get into an established trend. How to define a trend? Sive and Joe Dinapoli define a trend as the price closing above or below the 25x5 SMA three or more bars on the 4 hour or greater charts, if I remember right. Others say if the price is above the 200 EMA for a certain number of bars. It doesn't really matter. There are a lot of ways to define a trend, but one thing is sure, a ranging choppy market is statistically bad. It's where your broker makes money. Grid trading is supposedly for ranging markets but I don't understand how they handle it when the market stops ranging and you have several open trades that move against you. Trends are common but not every day. Wong until the count is in your favor.
So don't gamble in Forex, but if you do, gamble like a pro.
Here is some sobering math about your account, and some advice to stay solvent.
Assuming you had a fair 50/50 chance of winning all your trades or getting the stop loss hit:
Q: How likely are you to have a 7 trade losing streak?
A: Very likely. In 100 trades, the odds you will have 7 consecutive losers is 17.23%.
100 trades can be a day or two for the over-traders, or few weeks for a typical EA, or a year or two for the pros. (I doubt many successful manual traders trade that many times per year.) As the total number of trades goes up, this percentage goes up exponentially.
source: Probability - Coins - Ask the Wizard - Wizard of Odds
The chances of NOT getting a 6 trade streak, win or loss, in 200 trades is only 3.47%, assuming they were all 50/50 trades.
source: http://wizardofodds.com/image/ask-the-wizard/streaks.pdf
Theoretically that could be 7 losses out of the first 7 trades. That's not likely but you could hit the lottery and lose everything. Many have lost everything in a lot fewer than 7 trades.
Can your trading plan take a 7 trade loss streak and you still have the funds (and heart) to trade?
TIP 1: Trade small relative to account size.
Every successful professional trader can take 7 losses in a row. More even. One successful trader said he traded so small it would have been nearly impossible to bust the account. (Nice when you're that well funded.)A 25% draw down can happen to a well respected and overall very successful trader. You are very unlikely to have 11 or 12 losses in a row so make trade sizes small enough to put you in that bracket of safety. On the other hand, a losing streak of 5 or 6 over a relatively short career is near 100% certain, thus the title of the article.
Tip 2: To improve the odds, get into a trend.
Stay out of low probability time periods. In black jack, staying out when the odds are against you is called wonging, named after Stanford Wong a.k.a. John Fergusson. A wonger will watch the table, counting cards but not playing, during the low and negative count. He'll jump in when the count is high, meaning the likelihood of having a face card is very high. This drastically changes the house advantage to being a player advantage. He steps out of the game again when the count is low because the house has the advantage. This is how the MIT teams (there were more than one) made boat loads as depicted in the movie "21". They had team mates watch several tables and the wonger came in and made a ton of money on the hottest one.
In blackjack, if the player is playing perfectly and with standard Vegas rules, the house advantage is only about 0.5%, about the best in all of gambling. But math doesn't lie and this 0.5% makes buckets of dough for casino. It's compound winnings. But if the player stays out during the statistically bad times, he's evaded the rules of probability, basically letting the other players on the table eat the low odds time periods. He will always have a much higher chance of winning and compounding the winnings.
How does a Forex trader wong the market? Stay out until there is statistically higher probability of success. Get into an established trend. How to define a trend? Sive and Joe Dinapoli define a trend as the price closing above or below the 25x5 SMA three or more bars on the 4 hour or greater charts, if I remember right. Others say if the price is above the 200 EMA for a certain number of bars. It doesn't really matter. There are a lot of ways to define a trend, but one thing is sure, a ranging choppy market is statistically bad. It's where your broker makes money. Grid trading is supposedly for ranging markets but I don't understand how they handle it when the market stops ranging and you have several open trades that move against you. Trends are common but not every day. Wong until the count is in your favor.
So don't gamble in Forex, but if you do, gamble like a pro.