Can We Beat the Odds?

env_dice probability graph

I have been reading a TON of articles and works on probability and gambling, most of which comes from sources discussing the naturally destructive nature of gambling. I get it. It’s  being pounded into my head. Gambling bad. Working an hourly good. If people didn’t gamble, none of these guys would have their hourly jobs writing about the problems of odds and statistics and random events and no one would have ever moved west…. But whatever

Here is the question I am trying to answer. Is trading a string of random events or is it quantifiable? Is it the same as a roulette wheel or does the simple idea that there are buyers and sellers take it out of the realm of random and make it quantifiable?

The basic problem is that people who gamble often believe they can beat the odds and win. Even those who know the odds still believe they can win.”

Lets talk about random events for a second. Random events are unpredictable, erratic, unplanned and independent of each other. However, random events sometimes appear to form a pattern or serve a purpose. In other words, rolling dice can be considered a random event. “A random event occurs when a difficult problem (e.g. controlling the exact speed, movement and height of a dice throw) is combined with complex process (e.g. the dice rolling across a table and bouncing against a bumper on its far side). This combination leads to complete uncertainty as to what will actually occur.”

So with this definition, is a currency trade a random event?

I am going to try my best to explain my thinking here.

The first big difference is the actionable options. In trading, its buy or sell. That’s it. Now leverage and market participants emotions and perception as well as other factors play in to performance but there are only two buttons. On a roulette wheel (00) there are 38 spaces with three colors red, black and green. That’s a lot of options! A deck of cards has probability of pull that is 1/52 for any single card 1/13 for any given number or face card regardless of suit, and a 1/4 chance of drawing a certain suit (clubs, diamonds etc). So in my opinion, trading is not like a casino game. It’s not me vs. the house who has the odds stacked in their favor, as much as we want to think of our brokerage as “the house” it’s just simply not the case. It’s just buy or sell. Really, the counter party taking the other side of your trade is “the house” and unless it’s someone who has one of those windowless buildings in New Jersey that is spending millions to get a nano second faster information, the odds do not favor your counter party the same way they favor the house.

Now, because it is just buy or sell, where does this lead me to next? The oldest game in the book. The coin flip. Heads tails, bear candle bull candle. See the context?

The idea of the coin flip is the most overworked piece of probability I could imagine. Everybody discusses coin flips when talking about probability. The probability of a coin flip is 1/2. We all get it. And even if I flipped a coin 500 times and they were all heads, the probability of the next flip would be 1/2. This is where we run off the tracks. The failed concept here is that if a number hasn’t come up, its due to come up. If heads has occurred too often, tails is due while the actual nature of the random event is that coins and dice have no memories. How does this relate to trading? Well obviously there are two options in trading, buy or sell, so does that mean that every next candle is a coin flip? If so, would it even be possible to make consistent money? If it were a coin flip, every chart would revert back to 50% blue and 50% red candles. Interesting study idea!!

So how does this help me be a better trader?

To be honest with you, I’m not sure yet. I am writing some of my thoughts down mid stream to just get some of it out and organize it. At first glance, here is what I think.

  • I do not think that coin flip methods work in trading
  • I do not think trading is comparible to any casino game
  • I think trading is, at least in part, knowable because it’s human decision affecting outcome, not purely driven by probable outcomes. Its a marketplace, not a casino. 

Remember what I said before “coins and dice have no memory” but people do. Bankers buy at levels and set stops. People make rational decisions about where they believe is the best place to enter a market that probabilities can’t. Its the flow of buy and sell. Its what pisses us off when we are in a trade! “why won’t this bleepin thing go straight to my profit target?” Have you ever said that? The buying and selling is exactly what makes trading different from a coin flop or a roulette wheel. There is a natural ebb and flow and that is what we can try to find our edge in and make it pay.


So in some sort of conclusion, what I am trying to accomplish by learning to count candles in trading is figure out where it is more probable for buyers and sellers to come in and is there a any correlation between pip and time expansion and the move back to the mean.

Much Much more to come on this…



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