Oh, almost forgot. One assumption has to be that a successful trade has to be 2x more profitable than your loser.

When you trade you have a context: trend, news, supply, demand, etc. this will determine your chances of winning therefore it's not a 50/50 game.

Plenty of pure technical and interactive analysys to prove it is defenately not a 50:50 bet

Random walk theory is based on that assumption ,i think. Outcome of each coin toss is independent of the previous one. Thats where I have difficulty with that theory. For instance, it is hard to believe that each of those trading decisions in China market recently where made in complete vacuum. But I guess it makes a simple enough modeling tool.

There's a long term positive expectation owning equities; the wealth creation process is measured by profit.

The likelihood of a trade being successful is a function of the ability to predict price and trading/risk management strategy.

Since market price distributions are not statistically normal, then there must be a cause and effect relationship to price, which implies predictability of its behavior. With "over four years of exceptional research experience evaluating trading instruments to generate buy/sell signals," Umair, since your are still gainfully employed with a reputable firm, you are likely to agree.

"Random walks" are merely roughness or texture within the shape of the function of market price. I do not see how random a walk theory could predict the success of any trade.

So the success of any trade is primarily the function of two things: intelligence and the right education. Without those two qualities being present in a trading strategy, I'm predicting a much higher than 50% likelihood of losses.

You mean: Heads I win 2, and tails, I lose 1.. ? I'd take that game any day...

I prefer to think of the question in a different way. Rather than is trading links a coin flip - a random chance whether I will be right or wrong, I am more interested in the expectation of profit per dollar that I risk.

I am very happy being right only 30% of the time if the size of my wins are large compared to losses and I make good money overall.

I could be equally happy if 70% of my trades were winners as long as the wins were big enough to overcome the inevitably large loss that comes with a high reliability strategy.

Traders who tie themselves up with concerns about the percentage of trades that win miss a huge opportunity to make a lot of money with low effort trading something like a long term trend following system. These can win just 30% but winners are much bigger than losers so they make great money overall.

Thanks everyone for taking the time to reply! In my opinion, I think you have to look at the coin flip analogy under two different scenarios. Scenario 1: investors who buy and hold securities for a long period of time. Scenario 2: traders who are not investors but rather buy and sell as quickly as possible. Intraday (930 am to market close, excluding after hour trading) returns of SP500 since inception are indeed 50/50. 50% of the times the price from open to close nets a gain and 50% of the times the price from open to close nets a loss. The actual gains came after hours. Correct the long term expectation of investing is positive. But that still does not deviate away from the fact that your next trade can be a winner or a loser. It’s still a 50/50 chance. The path you come to the conclusion is not 50/50. In other words, when you enter a position, it’s either going to be a gain or a loss. You can be extremely smart and make most of your trades winners but at the moment you entered the trade, the only thing you know is that – this trade will be a winner or a loser. The long-term portfolio success depends on your money management skills rather than having the ability to predict the future. The fact is that you can’t predict the future – hence the 50/50.

@Jeff Hass: I agree with you 100% that education and intelligence is at the core of success.

random walk theory again?

Higher likelihood of positive outcome, lower profit at outcome. Converse would also be true. No free lunches unfortunately - well, at least if you believe in EMH. It works just like supply and demand does in everything in the world, whether it is finance, dating, or bacteria fighting over resources. I, however, am no trader, so take that with a grain (or many grains) of salt

If you believe in science, then the random walk theory is a fallacy. Everything that happens is a function of cause and effect. Lack of awareness of a cause and effect relationship that makes it appear random does not change the nature of the cause and effect relationship.

For example if we did not have access to weather predictions or rainfall history, we might assume that rainfall occurred randomly, but most scientists would agree that rainfall is a function of a weather system and does not occur as a random event.

With all due respect Peyton, neither finance, dating, nor bacteria fighting over resources follow EMH. If they did, then success rates would be randomly distributed, but I would speculate that investment returns (a small percentage make most of the money), dating "results," (some guys seem to get all the girls) and bacterial survival rates (certain bacteria thrive relative to others in certain environments) are heavily weighted towards the tails which would imply that in each system, the strongest survive.

Laws of supply and demand may seem to make sense until either the supply or demand curve suddenly shifts. If it is possible to anticipate sudden shifts in supply or demand curves then high likelihood of outcome and high profit at outcome investments theoretically can occur (and probably do occur for a small segment of investors that seem to be able to anticipate them).

Hey Jeff,

Very good points. I would of course agree that there is no such thing as a random event. My focus is not on short run outcomes, but rathr, long run outcomes that occur over an arbitrarily large number of transactions. If we knew, from an atomic level, all relevant information to a system then we could predict the outcome with near-100% ac piracy given an appropriate model. Unfortunately, we are nowhere near that for economic, social, or larger-scale biological phenomena and so our understanding grows reactively. As such, we can only know which bacteria would be most efficient (not necessarily the largest, or least prone to disease, etc) after the fact. We can base predictive models on this information but they suffer from the aforementioned limtations. I'd say that we then could not predict outperformance relative to expected result in any of those markets. Just my humble opinion.

Apologies for the spelling errors. My phone's predictive text is one cruel mistress

When it comes to trading the 50 / 50 chances of success are not true, this is highly dependent on the company, commodity or currency you are trading you should only invest in things that you have a good understanding of otherwise chances are 80% that you will loose money.

But if you have a trading professional that understands the market your chances of success are increased to 90% success.

For instance there are ways to ensure that you never loose money in any trades, these are the kinds of things only experience can teach you and those secrets are not told to people but you can hire people such as myself to handle your trades for you and we then let you profit by using the methods we have learned after 30 years of experience.

contact me and i can show you the way, but of course i get paid a percentage of what i help you earn :)

Markets display random walks with drift which also changes (otherwise we could make money going after the drift component) most of the time but every so often markets display a high degree of predictability I would say (even the noise component is not truly independent), separating the two is thankfully very hard to consistently perform otherwise there would be no chance to profit.

It's not just a matter of 'well you can either win or lose on your next bet, hence 50/50'. Doesn't work like that. Probabilities of a win on any given trial is highly dependent on the rules of the game and your approach of play. I don't think you can equate securities trading to coin flipping. There are firms out there that consistently make profits on thousands of small trials or bets per day. They wouldn't be in business if it the odds were not even slightly skewed in their favour. With that high volume of transaction, you only need a very small edge to make it worthwhile financially. And very small is typically all you can hope for [without privileged access to information, of course].

Based on Parrondo's paradox which is used extensively in game theory and financial risk analysis, a diversified equity portfolio has a high probability of winning.

In the context of directional trading the outcome of a trade is path dependent therefore as long as it requires more than 1-step it can not be by definition a 50/50 game. One can prove without difficulty ( or google it up ) that it is mathematically ( likelyhood =0 ) impossible to create a consistently profitable startegy which has a determined entry stop and exit right from the start.However it must be possible to create a consistently profitable strategy which utilizes a price model function. ( which incumbs upon each trader to discover for himself ) By our existance we prove that it is possible and there is a host of other companies who have been around for 20+ years and who have demonstarted outstanding results with the same approach year upon year. ( Winton, Aspect, Millenium, Brevan, Bluecrest etc etc ... ). I think it settles the discussion. Now the random walk argument does not hold either because sometimes markets trend when that happens it is not a random walk anymore therefore there must several distinctive regimes - one which is useless for directional trading which in fact is a random walk ( a price model function which describes it will be as least as long as the data segment itself ) and trending segment. So interesting question is how to detect regimes changes...