Experimenting With Probabilities

Ever since I listened to the Avery Horton interview, I've been looking more into probabilities.  Scouring the web brings up some interesting results, everything from advanced financial probability concepts to forex signal software.  I took statistics, probability, and advanced mathematical courses in college but some of the information was way over my head and I just don't have the desire or time to explore the advanced information.  

I started a simple experiment with historical GBP/USD data since January 1st, 2007.  I wanted to find out whether the price went up or down based on previous price action.   It's easiest to give an example of what I tried to do.

First, find out whether price action was BEARISH or BULLISH between 2:00 am and 8:00 am EST.  Then find out whether price was BEARISH or BULLISH after this period of time between 8:00 am EST and 5:00 pm EST.  So I'm splitting the day into 2 time periods.  The first period (between 2-8 am EST) is a non-tradable time period.  The second period is when an actual trade might take place. 

What direction will the price go after this first BULLISH or BEARISH period? 

This may be a total B.S. experiment but I wanted to start somewhere.  Based on initial testing, in 2007, here are the results:

BULLISH 2am-8am period resulted in the price closing UP from 8am-5pm 66% of the time.

BEARISH 2am-8am period resulted in the price closing DOWN from 8am-5pm 38% of the time.

Looking at the results don't show any correlation between past and future price action in this experiment because when the first period was BEARISH, the second period actually turned out BULLISH 62% of the time.  On the contrary, when the first period was BULLISH, the second period turned out BULLISH 66% of the time.  I guess this shows that the trend in the GBP/USD was BULLISH throughout 2007 and trading in this direction would have been most desirable.   

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Median Line Probabilities

Check out the site, "I found my Holy Grail" for Median Line Probability Charts.  It looks like the Median Line is quite the price magnet…

I Found My Holy Grail

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A Forex Trader Speaks His Mind

I’m posting an email I received from a fellow participant of Raghee Horner’s webinars today.  He has been utilizing Raghee’s methods for the last year and goes into the successes and failures he has had with them.  Keep in mind that he is a beaten down trader who started out with $30,000 and now has $3000 left.  I don’t necessarily agree with everything he says.  I don’t think because 1 person is unsuccessful at something that no one else has a shot.  One of his final sentences is "Do not think you’re going to realize your dreams by day trading."  I don’t believe this and won’t believe this.  I feel like his story will be beneficial:

I would say her setups happen quite a bit if you scan all the pairs. I am not good at position trading or sitting on trades, so I found it really hard to utilize the large time frames. I like to be in and out, a day trader. Her system is like any system, it gives you a method for entries and exits. Each entry has 50% chance of moving in your direction and her method gives you a slight edge or helps you gain a higher probability of being on the winning side. No trading system is consistently profitable, your either on the winning side or your not. The key is to get in when your system tells you to, act on your systems signals, utilize stops or get out as soon as the trade tells you it’s not going in your direction.

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Understanding Market Structure

There is another decent article in Stock & Commodities magazine regarding market structures.

Sometimes I neglect to identify the underlying market structure before entering a trade.  I’m hoping this post will help you and I.

This article identifies 4 market states:

1.     High directionality - low volatility : prices moving steadily up/down with no or little reaction or correction.  Trend following systems work fine in this scenario and oscillators will continuously give false signals.

2.    High directionality - high volatility : trend is well-defined and corrections are deep and volatile.  This scenario favors swing traders and counter-trend traders.

3.    Low directionality - low volatility : no or little direction and moderate volatility.  This is a very difficult environment to trade in and traders should wait for a new trend to ultimately emerge.

4.    Low directionality - high volatility : no or little direction but deep swings.  This market state favors swing, counter-trend, and short-term traders.

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