forex:probability

### Table of Contents

# Forex - Probability

Trading is thinking in probabilities and finding setups that make money.

## Positive Expectancy

- You may not make money on the trade right now, or even the next one, but if it makes money over the long run (has positive expectancy).

- You could have a system which is 35% accurate which still makes money (and a lot of it) over time.

- Get comfortable with uncertainty, and comfortable with losses (which are inevitable), then you will find yourself making good decisions more often than not.

## Probability

Profitable Trades probability = ------------------- Total Trades

## Example

Suppose that you have made nine trades, six of which turned out to be profitable.

6 probability = ----- = 67 9

What is the probability of winning for a future trade?

- The denominator of the fraction will increase by one for any outcome.
- But with the numerator, two options are possible - a future transaction may turn out to be either profitable, or unprofitable.
- In other words, we have two possible options:

(6+1) 6 probability = ------- or ------- (9+1) (9+1)

Using the average of these values, has the estimate of the probability of winning as follows:

6 + 0.5 probability = ---------- = 0.65 9 + 1

**NOTE**: This is slightly less than the original value of 6/9.

- This method is called Laplace smoothing.

## Smoothing using Weights

double value=price[i+center], // Price value at the center. max=_Point; // Maximum deviation. for(int j=0; j<period; j++) //Calculate price deviations from the central one and the max deviation. { weight[j]=MathAbs(value-price[i+j]); max=MathMax(max, weight[j]); } double width=(period+1)*max/period, // Correct the maximum deviation from the center so that there are no zeros at the ends. sum=0, denom=0; for(int j=0; j<period; j++) // Calculate weight ratios for each price. { if (Smoothing==Linear) // Linear smoothing. weight[j]=1-weight[j]/width; if (Smoothing==Quadratic) // Quadratic smoothing. weight[j]=1-MathPow(weight[j]/width, 2); if (Smoothing==Exponential) // Exponential smoothing. weight[j]=MathExp(-weight[j]/width); sum=sum+weight[j]*price[i+j]; denom=denom+weight[j]; } buffer[i]=sum/denom; // Indicator value.

## References

forex/probability.txt · Last modified: 2022/12/15 11:26 by peter