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Wanted to clarify some comments regarding Al's 40-60 rule.
Premise: Al says that the probability for 90% of the bars in a chart to go X ticks up and X ticks down is between 40-60%.
He then concludes that if you construct a trade with a reward 2X your risk, then your trader's equation will always be profitable since even if you only have 40% probability, the math checks out (0.4 * 2) > (0.6 * 1).
However, there appears to be a contradiction as the situation requires your risk to be X and reward to be 2X. Al's premise may still be valid, but it no longer applies here as you are requiring the trade to move 2X ticks in your favor before X ticks against. And clearly this probability is much lower than requiring the trade to move only X ticks in your direction (Perhaps even much lower than 40%).
Just wanted to bring this up in case anyone thought that if they always constructed a reward twice their risk that they would have a high chance to be profitable, the math doesn't check out. If there's something I'm misunderstanding about Al's idea, let me know.
I agree with what you are saying. Just want to add that I think Al says that the math is based on Actual Risk and not Initial Risk. What you are talking about is initial risk.
Looking forward to someone experienced answering..
@shubbamgmail-com at the time you put on the trade all probabilities must be based on initial risk. Theoretically there does not ever have to be a switch to an actual risk equation if the trade goes in your direction without any pullbacks.
Wanted to clarify some comments regarding Al's 40-60 rule.
Premise: Al says that the probability for 90% of the bars in a chart to go X ticks up and X ticks down is between 40-60%.
He then concludes that if you construct a trade with a reward 2X your risk, then your trader's equation will always be profitable since even if you only have 40% probability, the math checks out (0.4 * 2) > (0.6 * 1).
However, there appears to be a contradiction as the situation requires your risk to be X and reward to be 2X. Al's premise may still be valid, but it no longer applies here as you are requiring the trade to move 2X ticks in your favor before X ticks against. And clearly this probability is much lower than requiring the trade to move only X ticks in your direction (Perhaps even much lower than 40%).
Just wanted to bring this up in case anyone thought that if they always constructed a reward twice their risk that they would have a high chance to be profitable, the math doesn't check out. If there's something I'm misunderstanding about Al's idea, let me know.
There are two different probabilities, one is the directional probability, that a trader can use optionally. This one:
Premise: Al says that the probability for 90% of the bars in a chart to go X ticks up and X ticks down is between 40-60%.
And the other one is the probability he uses in the traders equation. So when you say:
He then concludes that if you construct a trade with a reward 2X your risk, then your trader's equation will always be profitable since even if you only have 40% probability
It is not correct, as you clearly said, you can't conclude from the directional probability, which refers to equidistant moves, anything out of them. Those two probabilities operate at the same time but can't be mixed, they are different.
You have an extensive explanation in his 2nd book, chapter 25 (Mathematics of Trading). He devotes a complete chapter to talk about this stuff. I read the books when I was starting out, few years later came the new video course and at the time of watching I didn't feel he was saying a different thing, but I don't really remember the details so I can't point you out anything in the video course… I can't say anything else but if you can have a look to the book I think it will be very clarifying.
Hope it helps!
Not sure what you meant here:
Not sure, maybe you are confusing directional probability with the other probability?
Also I think I explained myself poorly: What I meant was that the Math works out (if you don't believe that, the entire system goes down), but when evaluating a trade I don't think in terms of probabilities but in terms of like or dislike. So if I like the trade it is therefore good for a swing and I take it, reducing the mental process complexity.
Still not sure if I added more confusion or helped anything with this note. 🙂
