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Decoding Trading Odds: Demystifying Probability

Probability is a fundamental tool in assessing the success of a trading system and making informed decisions. In simple terms, probability tells us how often we can expect a system to succeed relative to the total number of trades executed.

Imagine you have a trading system with specific rules that are repeated over and over again. Each time we apply these rules and execute a trade, we're making an attempt. The probability of success is calculated by dividing the number of successful trades by the total number of attempts, giving us a kind of "success rate" or probability of success.

It's important to understand that a good measure of probability is only achieved after a large number of individual trades. It's akin to flipping a coin many times and counting how many times it lands on heads. The more flips you make, the more accurate your estimate of the probability of the coin landing heads on the next flip becomes.

Probability also helps us anticipate the future performance of our trading system. Imagine that individual observations of gains and losses are the input for this process. Statistical inference allows us to predict the future value of our account based on past results.

The intuitive concept of probability is simple but has significant implications in trading because it allows us to quantify randomness, essentially enabling us to eliminate uncertainty from our business.

Here it's important to differentiate between the uncertainty of the outcome of a single trade and the certainty of the average result projected into the future.

Since probability represents the average likelihood of an event occurring after numerous repetitions, considering the variability of individual observations, it allows us to estimate our potential profit or loss, establishing upper and lower limits of our returns and providing insight into the future performance of our trading system.

In summary, probability in trading is a powerful tool that helps us evaluate the success of our system and make informed decisions. The better we understand probability, the better equipped we will be to manage our risk and achieve our trading goals.



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