Coin Flip Trading

[scholfield]

On way to find out if it works.
I'll get back to you in 6 months

 

[scholfield]

trade 1
winner
+26 pips on 5
+ $1250

 

[trendie]

hi scholfield,

thanks for diving in there and participating.

To give an idea of returns relative to risk taken, I don't know if it's worth you also listing the total risk in dollar amounts if the trade went badly against you.
(ie, in the example I started off, the max return would have been 500 "pips" againt 300 "pips" risked.
The caveat being comms and expenses are additional charges to be accounted for.)

 

[scholfield]

I think my examples would be:
win - 5 lots at 25 pips = 125 pips

loss - 1 lot at -5
1 lot at -10
1 lot at -15
1 lot at -20
1 lot at -25
= -(75 pips)

?????????

 

[scholfield]

trade2

 

[scholfield]

close to target without hitting a stop.
lets see how it does

 

[scholfield]

trade 2
winner
+25 pips on 5
+ $1250

 

[scholfield]

trade 3
loser
all stops hit
-5 pips at 1 = -50
-10 pips at 1 = -100
-15 pips at 1 = -150
-20 pips at 1 = -200
-25 pips at 1 = -250

trade 3 = (-$750)

 

[scholfield]

trade 1 = +$1250
trade 2= +$1250
trade 3 = -$750

Day = +$1750

 

[scose-no-doubt]

The trouble in trying to reduce everything to mathematics is that you finish up with an almost impossible formula if you truly take into account all the variables mentioned by toastie and others. For my money, trading is more art than science.

In any event I doubt the basic starting point of 50/50 chance (on mid-price to avoid the spread aspect) of price reaching x or y in the first place. FTSE currently stands at 6574 so, arguing from absurdum, there is a 50/50 chance that would go to 0 or 13148. In reality, whilst the market exists, there is absolutely no chance whatsoever that it would go to zero - changing its constituents ensures that - so only 13148 remains as the possible outcome between the two.

S'abit of a silly example (the 0/13148 thing) if you're talking about setting your targets/stops within the average vol. Not quitethe same is it.

That being said I'm a firm believer in following the bias

 

[scose-no-doubt]

It is totally material because it is the amount you will lose overall.

Just like roulette. There is an inbuilt negative edge for the player. You cannot ignore it.

It's material if you're looking at the expectancy of the strategy but not if you're assessing whether scaling out would result in a skewed risk profile which is what he was asking.

 

[barjon]

S'abit of a silly example (the 0/13148 thing) if you're talking about setting your targets/stops within the average vol. Not quitethe same is it.

That being said I'm a firm believer in following the bias

yes, i took it to the absurdum extreme to make the point that you can't throw 50/50 around as if that's the certain result over time of whatever price levels you choose. It ain't necessarily so.

 

[Shakone]

Yes, it isn't necessarily so that it's 50/50. So the coin flip entry might be 45% win rate for example. And the opposite of the coin flip, which would be deciding that heads meant short rather than heads meant long is now a 55% win rate. But that's essentially a coin flip. So yeah a coin flip with a 55% win rate, and a 45% win rate...sure.

 

[scose-no-doubt]

Shakone loves driving home the point that a random variable doesn't mean the probability of each outcome is evenly distributed lol. I see why people use that approach though if you're waaaay inside the ave range.

Deviating once again from whether this would result in asymmetric risk prfoiling and coming back to the efficacy of the strat, uild on what shakmeister has said, your first port of call should be to assess a massive random sample of trades and find out whether your 50/50 holds true. If nit then you're basing everything on a flawed assumption.

 

[barjon]

Shakone loves driving home the point that a random variable doesn't mean the probability of each outcome is evenly distributed lol. I see why people use that approach though if you're waaaay inside the ave range.

Deviating once again from whether this would result in asymmetric risk prfoiling and coming back to the efficacy of the strat, uild on what shakmeister has said, your first port of call should be to assess a massive random sample of trades and find out whether your 50/50 holds true. If nit then you're basing everything on a flawed assumption.

I suspect my logic might be a bit flawed, but don't the characteristics of the instrument have an effect on the 50/50 assumption? I've already pointed out a characteristic of FTSE (and therefore the knock-on to the futures trading vehicle) to change constituents which limits downside, albeit that's extreme.

What about the characteristic of markets to move faster and in a more exaggerated fashion to the downside on bad news than they do on good news. Wouldn't that alter the assumption?

 

[trendie]

whether its 50/50 or not isnt really the issue, its more about the wobble and skew.

if you win 50% of the time, with no wobble, you collect the equivalent of 500 pips, and if you lose 50% of the time, you lose the equivalent of 300 pips, because of the skew of keeping all lots until they win or staging your losses if the market goes against you.

I am just using the coin flip as a starting point.
Its the skew I am more interested in, and whether if there is an edge, it can be utilised by introducing a directional advantage at a later stage.

My thinking is this:
If you correctly judge the market direction, you win.
If you incorrectly judge the market direciton, you lose.
If you cannot judge the market direction, you may win or lose due to randomness.

If you judge correctly, nothing more to do here.
If you get it wrong, can you use this method to minimise your losses.
If the market is in a random state, and bear in mind you may already have traded several times before you realise a previously valid direction is now ranging / random, can you use this method to reduce your losses, come out broadly even, or even slightly at an advantage even being wrong.

I am using the flipping coin as a starting point.

barjon: true enough about if you scale up, the 50/50 rule wont apply.
I was thinking really of basing the scales in such a manner that I got a completed trade very week.
That way the stages are far enough apart that the stages dont get hit on small wobbles.

 

[scholfield]

trade 1 = +$1250
trade 2= +$1250
trade 3 = -$750

Day = +$1750

trade 4
loser
all stops hit
(-$750)

 

[new_trader]

What about the characteristic of markets to move faster and in a more exaggerated fashion to the downside on bad news than they do on good news. Wouldn't that alter the assumption?

I amazed that you and others still believe that NEWS moves the markets.

 

[barjon]

I amazed that you and others still believe that NEWS moves the markets.

whatever, it moves on news so some bugger moves it at those times.

 

[kimo'sabby]

So, on a purely random trade, and excluding expenses, commission,s (for the time being), is there a 50/50 probability of a trade winning or losing?

For the purpose of examples, a 100 pip win or a 100 pip loss.

Would you expect an account to neither win nor lose?

(I have a cunning plan, more cunning than a cunning than a cunning thing fron the planet cunning, and doesn't require the usage of pencils up nostrils nor underpants.)

Do you think that profitable speculative traders are lucky?