Originally Posted by gkozlyk

You guys are correct with your corrections. To use historical numbers back to 1989, the 80% would be closer to 90%, but lets use 85% just for kicks.

Gain: 85 * 10 actual TP = 850
Loss 15 * 50 = 750 loss

So on basics after spreads, there is a net profit, though not much.

However the key with this system is the fact that lot sizes don't stay linear. They use something called Martingale (sp?), or in laymans terms, lot scaling based on probabilities... let me explain...

With this type of hedging and a 10 TP and a 50 S/L, you always cash one side out in profit, so right away you have only a 40 S/L worth of exposure. That being said, the loss number above actually lowers to 15* 40 or 600.

Also because there is that 80-90% accuracy, you increase your next lot size the next day to replace the last trade. With such a high accuracy, the odds of 2 day of simultaneous losses in the same direction becomes 15% * 15% or 2.25% for the second day. It is like the probability of flipping a coin and getting 2 heads in a row (50% * 50% = 25%). If the trade still went 2 days losses, then the odds of 3 straight days becomes 15% * 15% * 15% = 0.34%...and so on...

That is why one needs to consider this system not just on the classical things like Stops and Limits, but the mathematics of probabilities based on historical analysis.

Just as a point of interest, currently i am running 2 tradestations on 7 pairs at 2 timeframes, and both timeframes are yielding around 85% accuracy each, thus confirming the historical stats.

Thanx,

Graham