03.08.2019

Probability And Statistics For Trading

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Probability And Statistics For Trading 5,8/10 3037 votes
  • First Post:Oct 22, 2013 8:40amOct 22, 2013 8:40am
As the title suggests this thread is dedicated to a simple high probability trading strategy that I have been using for many years. It has evolved over the years as I have learnt different things from different traders and gone through the cycle of adding and/or taking away indicators for confirmation and that warm squishy feeling of entering a trade knowing or thinking rather that just because an indicator says to get into a trade it must be a winner.
Have I eliminated all of the indicators? No, but I do have considerable less than what I have had on my charts at one point or another. My charts today are pretty much bear with only a moving average and a cycle indicator to filter out some of the lower probability setups.
Now it is important to remember that none of what I am about to show you is new or magic or bullet proof. However with some practice, patience and discipline you will find that this system is about the easiest to trade, the most straight forward to learn and provides you with a high winning percentage. All of these are factors that I believe retail traders need to become a success in this market.
Ultimately I am going to show you how I make money from the markets.
Before we get started… I would like to outline a few rules for this thread. I haven’t done this before but it does seem that unless people do outline rules threads end up going off topic or arguments erupt. So here they are:
1. This thread is for the strategy I outline in this thread and that strategy only. If after some experience you start to add your own flavor to the system you are still free to post here but please do not let the thread turn into a thread of many strategies. The basic premise should remain the same which is trend trading with range bars.
2. No arguments! I am not saying I know everything about the markets and perhaps my approach doesn't suit your personality. That’s ok… I can accept that but please do not start attacking other posters on this thread or indeed myself just because we may have a different way of doing things to yourself.
3. Let’s have fun and make some money… so please post your trades, charts and questions
So what about the system… well to ensure that I don’t write war and peace in any one single posts and I keep the learning process simple and in bite size chunks I will outline the system over the next few posts.
Thanks for reading and I hope you find profitability with this system as I have.

Why Probability Based Trading Is Not Working. Part I: Credit Spreads. We’ve all heard: “If you set Probability and Expected Profit/Loss high in your trading, you will profit.” You were also likely told that this type of trading will mirror the casino business strategy, and, as everybody knows, this is a profitable model. Probability and Statistics for Petroleum Resource Assessment By Robert A. Crovelli1 Open-File Report 93-582 This report is preliminary and has not been reviewed for conformity with U.S. Geological Survey editorial standards. Any use of trade, product or firm names is for descriptive purposes only and does not imply endorsement by the U.S. Conversely, the probability of the object's states can be estimated using statistics. Here is where the main challenge for a trader lies: having data on trades over a certain period of time (statistics), to predict the price behavior for the following period of time (probability) and based on this information to make a buy or sell decision.

  • Oct 22, 2013 8:55amOct 22, 2013 8:55am
  • Joined Jun 2010Status: The Villain2,565 Posts
As the title suggests this thread is dedicated to a simple high probability trading strategy that I have been using for many years. It has evolved over the years as I have learnt different things from different traders and gone through the cycle of adding and/or taking away indicators for confirmation and that warm squishy feeling of entering a trade knowing or thinking rather that just because an indicator says to get into a trade it must be a winner. Have I eliminated all of the indicators? No, but I do have considerable less than what I have...

nexas. good to see you back.
i thought your other threads were really good. curious to see what else you have in your arsenal ?
get cracking ! the sooner the better.
  • Oct 22, 2013 8:58amOct 22, 2013 8:58am
  • Oct 22, 2013 9:21amOct 22, 2013 9:21am
  • Joined May 2007Status: MT4/MT5 EAs/Indicators/Alerts coder6,609 Posts
  • Oct 22, 2013 9:46amOct 22, 2013 9:46am
  • Oct 22, 2013 10:01amOct 22, 2013 10:01am
So let’s start with the charts. I personally love range charts. These are charts that are based on price and not time. So whereas with a time based chart the candle will open and close based on a predefined period of time and the price action for that period of time will be contained in that one candle, a range chart will open and close based on the price.
Now why is this important? Well during particular choppy periods in the markets, a time based chart will print many bars simply because of the elapse in time. This can make a chart look a little untidy and hard to trade. With range charts however this is not a problem because the consolidation can be contained within just a few bars as oppose to many bars. So trends are easier to spot and trade!
If you want a deeper dive into Range bars please take a look at the following link - http://www.investopedia.com/articles...erent-view.asp
So the first thing to understand is that I trade range charts. I use time based charts to gain a perspective but in reality I can do all of my trading just based off of these charts.
How big is the range I hear you say? Well to be honest this changes based on the volatility of the markets. But at the moment I am trading 8-10 ranges for day trading and 40-50 ranges for longer term trading.
Where can you get range bars? Well I did a google and found the following which may be helpful - http://www.dailyfx.com/forex_forum/g...-mt4-fxcm.html
Please note that I trade with NinjaTrader who provide range bars as part of their standard offering, although you do have to pay for the data feed… unless of course you trade with FXCM in which case I think you can get FX for free.
So in summary the charts I trade are range bars and as we proceed into this thread you will see just why I love them so much.
  • Oct 22, 2013 10:06amOct 22, 2013 10:06am
I'm wth you. after trading range bars, time based bars are more difficult to look at and trade. Everything looks much smoother with range.
  • Oct 22, 2013 10:31amOct 22, 2013 10:31am
Are Renko bars the same as range bars? Not really knowledgeable about either but this is an interesting thread, thank you Nexas.
  • Edited at 11:56amOct 22, 2013 10:44am Editedat 11:56am
The range bar measures a set range of price movements or number of trades and when that range or trades is met the bar prints. A renko bar does the same except the range has to be all in one direction for the bar to print. So with a 10 tick renko bar the range has to be all up or all down for it to print
Ex: A 10 tick range or trade bar could open at 100.00 and have 5 ticks up to 100.05 and 5 ticks down to 99.95 and the bar would print. A 10 tick renko bar would have to have 10 ticks up to 100.10 or 10 ticks down to 99.90 before it would print.
Got it? I hope so it exhausted me explaining it. Google with copy and paste is a lot of work
  • Oct 22, 2013 11:57amOct 22, 2013 11:57am
The range bar measures a set range of price movements or number of trades and when that range or trades is met the bar prints. A renko bar does the same except the range has to be all in one direction for the bar to print. So with a 10 tick renko bar the range has to be all up or all down for it to print Ex: A 10 tick range or trade bar could open at 100.00 and have 5 ticks up to 100.05 and 5 ticks down to 99.95 and the bar would print. A 10 tick renko bar would have to have 10 ticks up to 100.10 or 10 ticks down to 99.90 before it would print....
You should go on the road to teach forex seminars at high end resorts and hotels - very clear and succinct. Thank you
  • Oct 22, 2013 12:20pmOct 22, 2013 12:20pm
I'm looking forward to his ideas. His starting point of tick charts, 1 indicator and 1 MA appeals to my style and way of thinking. I want to see and hear what Nexus thoughts and findings show with this style and mindset. Personally I use ticks, what appears to be a slow MACD (except the Histogram) and trendlines
  • Oct 22, 2013 1:20pmOct 22, 2013 1:20pm
  • Oct 22, 2013 4:20pmOct 22, 2013 4:20pm
  • Joined Jun 2009Status: Patients needed!201 Posts
Subscribing!!, Nexas ,Good to see you around again and range bars , well , my favourite.
good trading to you as always
doc.
range bar indi's for mt4 are still found here - http://www.forexfactory.com/showthread.php?t=326958
Probability And Statistics For Trading
  • Oct 22, 2013 4:50pmOct 22, 2013 4:50pm
  • Additional UsernameJoined Mar 2013317 Posts
Subscribing!!, Nexas ,Good to see you around again and range bars , well , my favourite. good trading to you as always doc. range bar indi's for mt4 are still found here - http://www.forexfactory.com/showthread.php?t=326958
I clicked on the link. Which range bar does Nexas use? Nexas can you post the range bar indicator that you use opn here so we are all on the same page?
Also does anyone know of a good renko bar indicator? Would love to compare the 2. Many thanks.
  • Oct 22, 2013 4:58pmOct 22, 2013 4:58pm
  • Joined May 2011Status: Member147 Posts
well, i look to go into it ...i personally found good setups when a range bar open and close up/down a moving average , i use a 10 period sma and 20 pips range/renko bars .
The cross is really a good setup , because it's based only on price..no time is involved , if you open a chart and apply this setup you will see that many times the moving average acts like a trendline.
i only presented my recent strategy , i am really curious about yours.
please go on
  • Oct 22, 2013 5:05pmOct 22, 2013 5:05pm
  • Joined Jun 2009Status: Patients needed!201 Posts
{quote} I clicked on the link. Which range bar does Nexas use? Nexas can you post the range bar indicator that you use opn here so we are all on the same page? Also does anyone know of a good renko bar indicator? Would love to compare the 2. Many thanks.
Hello Fellow dr.!!, nexas uses ninjatrader which has rb's built in. If MT4 is your thing then either 's constant range bars' or 'range bar chart v103a' should work fine.
doc
  • Edited Oct 24, 2013 1:28amOct 23, 2013 3:27am EditedOct 24, 2013 1:28am
  • Commercial MemberJoined Dec 20101,135 Posts
1. This thread is for the strategy I outline in this thread and that strategy only. If after some experience you start to add your own flavor to the system you are still free to post here but please do not let the thread turn into a thread of many strategies. The basic premise should remain the same which is trend trading with range bars.
I use TradeStation broker/platform for my charting and it has native support for Range Bar and Renko. Below pictures are comparison between a regular time-based 15mins chart of EURUSD vs Range Bar 5pips vs Renko 5pips. That's as far as we should talk about Renko, it's really not relevant to what Nexas has to share.
No longer trading forex. Looking for full time job.
  • Oct 23, 2013 12:12pmOct 23, 2013 12:12pm
Hi Everyone,
Wow lots of posts! I see that you all seem to be helping each other which is exactly as it should be.
OK so onto the next part of the system. The Indicators.
I have played with a few different things but as I said simplicity always wins. I find I can see the market best and take the best setups when I am not distracted by loads of lines so I always come back to one moving average and that is the 100 EMA.
The rule for this is simple. If the market is above the line I am looking for buys and if it is the below the line I am looking for sells.
In addition to the moving average I use one cycle indicator to stop me getting into bad trades and that is the CCI. I use 7 period CCI but I don't use it as you would imagine. As oppose to using it as an entry indicator I use it as a filter. So I let it tell me when not to get into a trade.
The rules are simple when I get my entry signal (to be covered in a later post) for a long the CCI must be above -50 and for a short the CCI must below +50.
The reasoning for this is simple. We are trying to ride the trends but only want to be involved when the trend is in motion and not during the retracement. So we use the CCI to indicate to us when one cycle is finishing (the retracement cycle) and the new cycle is beginning.
So to summarize...
100 EMA
7 Period CCI
For Longs
Price above 100 EMA & CCI above -50 on the entry signal

For Shorts
Price below the 100 EMA and CCI below +50 on the entry signal
  • Oct 23, 2013 12:16pmOct 23, 2013 12:16pm
My entry signals are very easy... I just wait for a pull back and then for two consecutive candles back in the direction of the trend.
I place my stop behind the swing high and look for a target of over 1:1
So if you look at the previous post you will see that the arrows are pointing to two consecutive candles in the direction of the longer term trend in the same instance as we get the CCI setup. If these happen together we are good to go!
Next I will talk about price action. Up til now I have talked about the technicalities and science of the system but now we need to look at the art of the system
  • Oct 23, 2013 1:59pmOct 23, 2013 1:59pm
Hello, thanks for the system. I have some questions.
What bar height do you use?
What is the system winning percent?
What is the time to trade this system? (from what to what time)
thank you for answers.

How To Choose The Best Chart Patterns

Today I want to discuss a few different chart patterns that beginners should focus on when they first start out day trading.

Many traders start out with what I call indicator fascination and delve into advanced analysis methods that can confuse them and often times discourage them from continuing trading.

When I started out trading I was under the impression that the more difficult trading methods would produce bigger winners or higher probability of winning trades.

I purchased several books and magazines that discussed Gann Lines, Geometric calculations and Elliot Wave Principles that required a PhD in physics to understand correctly. It goes without saying but I can promise you that the only thing I learned after following these methods was to stay away from them as far as possible.

Profitable Day Trading Chart Patterns Should Be Simple

Fortunately, I met a few professional traders who mentored me and showed me some simple strategies that got me on the right track and more importantly made me understand that profitable trading is not about complex and confusing trading patterns or strategies but about finding simple methods that matched my emotional make up and my risk tolerance.

So today, I’m going to show you a few basic day trading chart patterns that should get you started on the right track.

Always Begin With Daily Chart Patterns

The most fundamental mistake beginners make is beginning their search for chart patterns using intraday time frame.

I always encourage traders to begin their analysis with daily time frame and then move on to intraday time frame when they are actually getting ready to enter the trade.

While there are some markets such as E-mini SP futures and Forex markets that you can begin analyzing using hourly or shorter time frame bars.

However, for the most part most financial instruments respond best to daily chart analysis to begin with.

You can see in this example I’m looking at a symmetrical chart pattern set up.

I want to wait for the initial breakout to occur so that I can day trade if the stock continues momentum after the breakout.

Usually after a tight symmetrical triangle, the stock is very wound up and is ready for strong momentum that should last 2 to 5 days.

Symmetrical Triangles Offer Very Low Risk And High Profit Opportunity

You can see the actual entry in this example.

Probability And Statistics For Trading Money

Notice I completely relied on the daily chart for my analysis, entry and exit.

I do watch the intraday chart while I’m in the trade, I mostly focus on the daily chart to make sure the pattern is developing correctly.

In this case the triangle breakout continued upwards momentum and closed near the high of the day.

Probability And Statistics For Trading Post

I would use a simple MOC (market on close) order to liquidate the position at the end of the day.

What I like about triangles is the inherently limited risk due to lack of volatility while the pattern is setting up.

This is one of the reasons why triangles are good low risk high reward patterns for beginners.

Make Sure The Market You Choose Demonstrates High Volatility Before Entering The Triangle Pattern

The next low risk day trading chart pattern I want to show you is the bullish flag pattern.

It’s similar to the triangle pattern but has a slightly wider channel range and typically slopes down a bit more.

Notice the risk level is equal to the size of the bars that make up the flag.

I would look for a strong breakout day outside of the flag for an upside entry.

Flags are congestion patterns that tend to explode with good momentum once the congestion phase comes to an end.

Breakouts From Bullish Flag Patterns Typically Begin With Strong Momentum

You can see the entire sequence in this example.

Notice how low the risk level can be when the bars before the breakout are consolidating and have a tight trading range; these are the type of patterns you want to isolate for day trading.

The risk is very small compared to the profit potential and because your entering right after the consolidation stage the market is primed for volatility.

Statistics And Probability 101 For Trading

The profit on this trade was close to three dollars and the risk level was close to one dollar.

Unfortunately, day trading does not provide opportunity for huge profits because you are limited to how much time your position has to develop.

You should look for set ups that provide you with a two to one risk opportunity at a minimum.

The Stock Broke Out Strongly After Two Weeks Of Range Bound Trading

Things To Keep In Mind

Start Day Trading with simple patterns that make sense.

Avoid difficult mathematical formulas or calculations that involve geometry or statistics.

Look for opportunities that provide high potential reward and low risk so that the size of the winners is at least twice the size of your losers.

In day trading the profit potential is limited because the market is only open for a limited amount of time.

You need to maximize your profit potential by picking simple trading patterns that make sense to you.

For more on this topic please go to: Opening Range Breakout and Technical Analysis Patterns – Continuation Patterns

Wishing you the best,

By Roger Scott
Senior Trainer
Market Geeks