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Discussion of the day - Probabilities

The following discussion is one we had on a recent trading day in the Demo Chat Room, where Auto Pilot Day Trading calls trades every day.

Dyno: If you toss a quarter 10 times and it lands on heads every time, what is the probability that the 11th toss will also be heads (assuming the coin is not weighted in any unusual way)?
David: 50/50
Dyno:If you were wagering based on tails being the winner, when would you give up this bet, if at all?
David: I would stop after 3 losses in a row.
Dyno: OK, why?
David: So I can live to play another day.
Dyno: So, on day 2 your adversary tosses three more heads, then what?
David: Stop again until next day.
Dyno: Are you just prolonging the agony? (no correct answer by the way)

Dyno: Similarly, if you have a winning percentage on a certain trade strategy of 70% and you have just finished 10 winning trades, what is the probability that the 11th trade will be a winner also?
David: 50/50
Dyno: I think I tricked you - would still be 70/30.
David: Yea you're right.
Dyno: Knowing that over time, you would have winning trades 70% of the time, how many trades a month meeting the criteria would you prefer to enter?
1. 10
2. 100
3. 1000
David: Number 3
Dyno: Of course.
Dyno: Possible conclusion. Money management needs to be done on a per trade basis, not on a per day, month or year. So, if you are risking say 1% of your capital on each trade, you need to take as many trades as possible that meet your criteria. Otherwise, you are likely to stop after say 3 losers only to watch the next 7 trades win. Over the long haul, the winning percentage should prevail (otherwise the real percentage of winners differs from your 70% assumption).

 

 

 
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Any advisory or signal generated by Auto Pilot Day Trading, LLC  is provided for educational  purposes only. Any trades placed upon reliance on Auto Pilot Day Trading, LLC systems are taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading commodity futures, there is also substantial risk of loss in all commodity futures trading. You must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell futures, options or commodity interests.