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Difference between gambling and speculating
P (gamble) < 50%
P (speculation) > 50%
where a success is a breakeven or better trade
In practice cost need to be included
So
P (gamble) < 65%
P (speculation) > 65%
where a success is a breakeven or better trade
Assuming a 15% cost base (e.g. slippage, brokerage, data, chart, books, wages etc)
That is just the probability for a singal trade
What about a system?
A winning system:
P (win) * average size of a win > P (loss) * average size of a loss
sub in the probabilty from above assume a 1:1 risk to reward for example 100 point stop loss 100 point profit target
For a gamble:
P (win 35%) * 100 > P (loss 65%) * 100
35 points is not greater than 65 points
For a speculation
65 points is grater than 35 points (a winnig system if you ONLY trade when the odds are in you favour (i.e. follow you system))
Could tally costs at the end rather than the start but putting them first forces you to look at them.
Can adapt the elements of a system (i.e. probability of a success, stop loss and profit taking to judge whether it will be a sucess. i.e. entry signals, stop loss points, profit taking points)
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