Lokes
08-17-2009 11:30, 11:30 AM
Long Term Indulging at a Negative Expectancy Game
***** Caveat***** Many will disagree with what I am about to write. If you cannot accept mathematical certainty, please don't waste your time studying this.
Trading retail FX is a negative expectancy activity. I hope all readers understand what negative expectancy is....but I will give a very short description. Every trade opens with a negative at the profit/loss column due to the spread. This spread has to be overcome on any trade before profit could be submitted. If there were no spread, FX would be a game of neutral expectancy, meaning overtime random entries could be made out of equidistant profit and stop loss points. Over a significant number of trades you would like to break even. The spread makes that profit and stop loss points non-equidistant and puts FX trading in the realm of negative expectancy. Should you go with a 2 pip spread, you have to go a 10 pips greater for a 10 pip profit, but you want just 8 pips lower for a 10 pip loss. I hope that everyone can see that, from a probability standpoint, FX is adverse expectancy.
Thus, how to overcome this negative expectancy? You need to have a system that correctly predicts the direction of a currency pair in a rate of higher than 52 percent (give a 2 pip spread) while keeping profit and loss points equidistant. You may manipulate your system up or down this scale. As an example, you may reduce your win , but you have to correct your profit point to compensate for the win rate.
Is there a system that can produce positive expectancy with equidistant profit/ loss points? I don't think there is such a system accessible to small retail traders. None that I have reviewed hold up to long term scrutiny, although I've observed claims of systems. Please don't buy a retail FX program. If one of these systems could generate a positive expectancy, even a tiny one, the programmer would be wealthy beyond their wildest dre rather than interested attempting to get you to send your cash to them.
I've a winning strategy --how long until I'm wealthy? Perhaps you have access to inside information and can forecast currency management at a winning rate. You are still not home free. You have to conquer randomness in the market and handle your cash in order to not allow randomness and volitility wipe out you. Consider the following: You have a system that generates 60% win rate given equidistant profit reduction points. Transactions must I enter to be 99.9% sure of a win? N= log(1-.999)/ log(1-.60). This yields N=7.5. This number tells us every 1000 trades you may hit on at least 1 stretch of at least 7 or 8 winners in a row-- even with an win rate of 60%. Don't be surprised when these losses happen, they will happen to some mathematical definitely of 99.9%.
Some people make big money in FX. Absolutely some do. Some take accounts of $500 and turn . $500 is taken by some blackjack players and turn it into $20,000 in a few hours. Same for blackjack, craps, etc.. These folks are currently experiencing short term volatility in a way that is positive. It cannot be sustained and should they continue to trade or perform for an elongated period of time their account balance will be zero.
Conclusion. Please don't take this to mean I'm a kill joy! I have traded FX for quite a few years and have had periods of great success, together with fantastic disaster. I trade from time to time, however I do it for fun, somewhat akin to casino gaming. If you are trading retail for any other reason you will be disappointed. You could be effective for a few months or even years, however ultimately if you trade you will be wiped out.
***** Caveat***** Many will disagree with what I am about to write. If you cannot accept mathematical certainty, please don't waste your time studying this.
Trading retail FX is a negative expectancy activity. I hope all readers understand what negative expectancy is....but I will give a very short description. Every trade opens with a negative at the profit/loss column due to the spread. This spread has to be overcome on any trade before profit could be submitted. If there were no spread, FX would be a game of neutral expectancy, meaning overtime random entries could be made out of equidistant profit and stop loss points. Over a significant number of trades you would like to break even. The spread makes that profit and stop loss points non-equidistant and puts FX trading in the realm of negative expectancy. Should you go with a 2 pip spread, you have to go a 10 pips greater for a 10 pip profit, but you want just 8 pips lower for a 10 pip loss. I hope that everyone can see that, from a probability standpoint, FX is adverse expectancy.
Thus, how to overcome this negative expectancy? You need to have a system that correctly predicts the direction of a currency pair in a rate of higher than 52 percent (give a 2 pip spread) while keeping profit and loss points equidistant. You may manipulate your system up or down this scale. As an example, you may reduce your win , but you have to correct your profit point to compensate for the win rate.
Is there a system that can produce positive expectancy with equidistant profit/ loss points? I don't think there is such a system accessible to small retail traders. None that I have reviewed hold up to long term scrutiny, although I've observed claims of systems. Please don't buy a retail FX program. If one of these systems could generate a positive expectancy, even a tiny one, the programmer would be wealthy beyond their wildest dre rather than interested attempting to get you to send your cash to them.
I've a winning strategy --how long until I'm wealthy? Perhaps you have access to inside information and can forecast currency management at a winning rate. You are still not home free. You have to conquer randomness in the market and handle your cash in order to not allow randomness and volitility wipe out you. Consider the following: You have a system that generates 60% win rate given equidistant profit reduction points. Transactions must I enter to be 99.9% sure of a win? N= log(1-.999)/ log(1-.60). This yields N=7.5. This number tells us every 1000 trades you may hit on at least 1 stretch of at least 7 or 8 winners in a row-- even with an win rate of 60%. Don't be surprised when these losses happen, they will happen to some mathematical definitely of 99.9%.
Some people make big money in FX. Absolutely some do. Some take accounts of $500 and turn . $500 is taken by some blackjack players and turn it into $20,000 in a few hours. Same for blackjack, craps, etc.. These folks are currently experiencing short term volatility in a way that is positive. It cannot be sustained and should they continue to trade or perform for an elongated period of time their account balance will be zero.
Conclusion. Please don't take this to mean I'm a kill joy! I have traded FX for quite a few years and have had periods of great success, together with fantastic disaster. I trade from time to time, however I do it for fun, somewhat akin to casino gaming. If you are trading retail for any other reason you will be disappointed. You could be effective for a few months or even years, however ultimately if you trade you will be wiped out.