Thread: Risk is not the same as probability

I observed that many new Currency Market traders think that risk is very similar or identical to probability.
Nothing more erroneous, at least according to my experience.

Seeking trades probability just as on the roll of a dice appears to be a mistake. Rolling a dice is (in principle) random. But Currency Market is more unpredictable, rather than random.
Let's take a look on the probability distribution of the ideal rolling of ideal dice. For a high number of rollings, each result (1. .6), will be chosen almost the same amount of occasions.
However, on Currency Market changes are not random. Small changes are a result of huge number of unpredictable factors. Big moves are a result of small number of predictable factors.

Determined by which are your egy assumptions, a few specific move might be less probable, even if it is not many pips away, and opposite move might be more probable, even if it's far away from the beginning.

If it's not, than You cannot look just on a risk-reward ratio. More accurate would be Profitability calculated this way:

Pf = (Bonus * likelihood of Reward) / (risk * likelihood of a risk)

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

Reward/risk = 0.5 but profitability Pf = 2.7 // worth significantly higher than one gives greater chances to trades

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

The issue however is the way to learn what is the likelihood of a risk or a reward.
How to compute it?
Is it possible?

I want to hear from You guys what's Your opinion on this subject.
I also have a lot of wisdom and observations that I would like to share, so I'm looking forward to get some interesting articles from You.

Cheers!

Originally Posted by ;

I discovered that many new forex traders feel that risk is quite similar or identical to probability. Nothing more erroneous, at least based on my experience. Looking on trades probability just as on the roll of a dice appears to be a mistake. Rolling a dice is (in principle) arbitrary. But forex is much more inconsistent, instead of arbitrary. Let's take a look on the probability distribution of the perfect rolling of perfect dice. For a large number of rollings, each result (1. .6), will be chosen almost the exact same number of occasions. But on forex fluctuations are...

Hi there.
You are in fact trying to combine two things.
Risk to reward ratio is nothing more then just how much you can afford to drop to just how much you really target to get.
Probability of your trades is only up to you.
The more R :R of your trades is the less chance you are able to afford to stay BE.
As of your case:
Your R:R is currently 10:3 or about 33.33...% wich in turn will force you to get win rate of 78% simply to be slightly positive in over words you want to acquire 78 trades from 100... And should you think about this in terms of time. . .plus don't forget about emotional aspect-you will wipe off your recent 3 profits taken by only 1 SL.
High R :R with acceptable win rate is better than very low R :R using high win rate by mathematical and plogical measures.

Originally Posted by ;

Look, you only place a trade as soon as your trading edge is present on the charts. If your trading edge isnt present, you'd be risking blowing your account to pieces.

Hi Kaymeis!
Nice view, but how exactly would You describe somebody's trading edge.
Of course I agree with you opinion, but I am not really sure if I know exactly what exacly you mean by trading edge.

Cheers!

If we estimate loss per transaction , could be helpful. As a example , how much loss can we create daily. We must fix loss first. Let probability of profit fortified.

Originally Posted by ;

quote Hi Kaymeis! Great opinion, but just how would You describe somebody's trading edge. Of course I agree with you remark, but I'm not really sure if I know what exacly you mean by trading edge. Cheers!

I think it's about how confident your premises is.
Discipline-confidence-trading plan-money management.
Many people today say that a failure system with reduced win rate but with great MM can continue to be profitable... But do not overlook time you investing in trading..if you are chained to your PC all days trying hard to make 100-200 pips at a month... Well for me it's not worth it. . .You can find or earn another money however you'll never have the ability to make your wasted time.ROI percent is all that matters at the conclusion of the day.

Originally Posted by ;

quote Hi there. You're in fact trying to unite two things. Risk to reward ratio is nothing more then just how much you can afford to drop to just how much you wish to get. Probability of your transactions is only up to you. The more R of your transactions is the less chance you are able to manage to stay BE. As of your case: Your R is 10:3 or about 33.33...% wich then will force you to get win rate of 78% just to be marginally positive in more than words you want to acquire 78 trades out of 100... And should you consider this with regard to time. . .plus do not...

Hi G.KAD! .
Thank you for interesting reply.
That is a lot of true: I'm combining inside two distinct things, maybe not that opposite.
I concur that if risk/Reward=100/30 than I want much more winning trades than loosing ones, same as you stated one SL will completely wipe out my 3 TPs. Agree!
Let us leave today the plogy influence in our winning rate for an instant.
What I am saying is that lots of traders handle R as the main determinant of winrate, i.e. the more is Reward compared to risk the more winning the entire egy is.
This sounds to me completely wrong.

In my opinion if we will think about a few areas of each chart where price will proceed more or less likely,
and when we can skillfully determine these loions,
then we can really make trades with higher likelihood of win, nearly independently of risk:Bonus ratio.

I wouldn't also tell myself that the probability is up to me, or up to some other trader. It is more determined by such factors such as:Kind of egy or egies way of using the egies (starting, setting, FINISHING) to not short distances of SLs (so it won't be hit by some false moves or noise moves) not too long distances of TPs (so a transfer we're expecting can be long enough to accomplish that) I enjoy Your last announcement:

High Definition with decent win rate is better than really low R using high success rate by plogical and mathematical measures.

I'll consider that. .

Originally Posted by ;

quote In my opinion if we'll think about a few areas of each chart where price will go more or less likely, and when we can skillfully determine these loions, then we can actually make trades with higher likelihood of win, nearly independently of risk:Reward ratio. I wouldn't also tell myself that the probability is up to me personally, or up to another trader. It is more determined by such variables like: type of egy or s....

You see, today you're talking about some kind of a trading plan,not regarding winning 76 out of 100 trades but around odds of this concrete commerce that you would like to get in. . .and ask yourself this-OK, I think it's high probability of this market to hit my 30 pip goal, do I really need my stop to become 100pips on this trade?I see there's last swing high around 20pips and when it is going to break there's a greater chance for my own 100pip cease to be struck... So maybe I'm better to take my own stop slightly up that swing top in case of whipsow? Just an example... I am a newbie... However, I Believe that's right

Risk management and cash management is necessary to survive from the Forex Trading, you have to understand that if you wanna eventually become successful from the Forex Trading, you require a lot of things to understand.

Originally Posted by ;

When we estimate reduction per transaction , could be useful. As a example , how much reduction can we create a day. We must repair reduction first. Let probability of profit fortified.

I believe this a good narration in my opinion nevertheless we can even use stop loss too to cut off our losses in start instead of loosing up the entire money.

Originally Posted by ;

When we quote reduction per transaction , could be useful. As a example , how much reduction can we make. We must fix loss. Let probability of profit strengthened.

Good suggestion but estimate reduction per day is really tough to forecast, because the loss occurs according to markets movements and we can't forecast the actual faction of this market with certainly whatsoever.