# In Trading Odds Always Change

“The most important thing in gamblin’ is knowing the sixty-forty end of the proposition and knowing the human element. Some folks may know one of ‘em, but ain’t many know ‘em both. I believe in logic. Cut and dried. Two and two ain’t nothing in this world but four.”

Buggy Pearson

One of the greatest poker players in the history of the game.
Dropped out of school at 10 to support his family during the Depression

The longer I trade, the more I think about Buggy Pearson who at the core was a man who understood probabilities, not only in the abstract sense of the word but in the very specific concrete application of the idea.

Let’s say we are trading a strategy that is 70% accurate and has 1:2 risk reward profile. The take profit on this strategy is 10 pips and the risk is 20 pips. Now every single trader who opens up a trade with this strategy fully expects to win 10 pips. After all, why would you bother making a trade if you didn’t think you could take 10 pips out of the market? The truth, of course, is a lot more subtle than that. Your actual win on this strategy is -- Just.One.Pip.

Why?

Well, the weighted probability of this setup is equal to .(70%*10 -30%*20)/10 which is in fact 1 pip per trade. So instead of getting mad when you get stopped out, perhaps even 2 or 3 times in row, thinking in weighted probabilities really helps you get a clearer sense of perspective

You are not meant to win every trade. If you did, the game as we know it could not exist. In fact, when you think about weighted probabilities you begin to understand that that losing is the only thing that allows you to win.

As long as you lose with control.

Unless…

You consider dynamically adjusting the odds.

Of course, you need to do your own research and see if negative profit makes sense in your setup. Generally, that type of structure works best on high probability negative risk-reward trades. But this is just one example of Buggy Pearson’s eternal observation that knowing the odds is not enough. You need to know your current condition because in trading odds always change.

1. Douglas Harrison says:

EURUSD > 1,2350 before end of day.

2. Chris says:

And there I was thinking that Pan-Am was the only Company to ever manage a Negative Profit. 🙂

3. Douglas Harrison says:

Came back to 1.2360

4. David says:

It’s like having a trailing target

5. Richard Boer says:

Great subject! I was also pondering on how to implement this. And indeed many of the losing trades, give you one good opportunity to get out at break even or a small loss. I’m still struggling with the greedy side of me, thinking it will move on towards target. Letting the EA do this for you is a great way to remove the emotional element.