How I use statistics in my trading

Statistics have been part of my trading since I started, but at the beginning my understanding of probability was rough to stay the least and over time my extend I use them day to day has increased.

 

Whilst I tweet some of my statistics every day, I will not be giving a list of all the statistics I use in this post. This is not because statistics give me some secret edge in the market, they are certainly no holy grail, but they do take time to research, correlate and keep updated, and it must be said that the majority of the time invested into researching statistics will result in dead ends.

At the end of this post, I will post some links to various resources which will provide walk throughs on how to compile various statistics in excel and many ideas for statistics  that you might want to research in your own market.

Statistics can give an edge in the market, but it is not always an tradeable edge. For example, a 7 tick gap within yesterdays range has a 75% chance of closing before the end of the day. But the market can go offside all day and then close the gap a few minutes before then end of day. This has completed the statistic but I would argue that tieing up capital all day to earn 7 ticks is not the best use of emotional and trading capital.

Questions I ask myself

The first question I ask myself, does this statistic give me room for my trade to reach its first couple of scales, and can I use it  to shape my profit target for any runners.

Taking the example of the gap inside range, I would be looking for one of my step ups to allow me take a trade in the direction of filling the gap, if no setup then no trade and if the gap closes, so be it. If price has moved away from the gap and my initial targets drop short of the gap close, then any runners would target the gap close.

I will not take a trade that fades a statistic that is on the verge of being completed. For me this means that if price is within 10 ticks of a level which my statistics say has over a 60% chance of being closed, then I am not going to trade opposing this stat.

The next question comes when price reaches an area that statistically is unlikely to go further, unless there is a very good reason / context then I see a little point in taking a trade or putting targets past a price which statistics have show that over a large sample that it is unlikely to hit. If there is a good reason or my context model which takes into account the various stats says that there is more room then my trades tend to move to scalp scales.

Of course it is worth pointing out that what ever the statistic may say, that there is 50% that this time it could go further, and as I do not know the sequential order of which moves will fall within the curve of the statistic and which will not.

My trading revolves around taking the “easy” ones and trying not to do anything stupid in between these trades, so unless there is a valid reason I will use statistics to help me decide if there is room for the trade and to shape scales and targets.

Once price has reached an area that statistically is likely not to go any further, then depending on context , I will start stalking a trade to fade the move.

I will not take a trade fading a move just because it is past its rotation length, daily range, individual day range or day type range, but it will start a process of looking for a setup or level to get into a trade that will fade the move. Of course context will help decide the scales and targets of this trades.

For example, if price rotation has reached a distance without any pullbacks that my statistics have show that rotations of these lengths in the past, have a 90% chance of pulling back a certain length before continuing. Then I would be looking for as setup to scalp fade the move back towards the pullback end point  and would be looking for a setup to join the move at around or beyond the price of the statistical minimum end point of the pullback, taking into account any stats that could limit the continuation of the move.

The primary use of statistics for me is to provide context to my trades and tradeplan, they help decide whether a trade is worth taking, and when I decide to take a trade they can often boost the win rate and overall expectancy of these setups.

I am sure there are many different ways of incorporating statistics into a trading plan, this is just the way I use them. If other traders have any suggestions then please feel free to leave a comment.

Resources

How to draw a simple histogram in Excel

http://youtu.be/2y_xrbA6MgY

Rotations

http://www.futurestrader71.com/?p=2367

Alternative way of calculating rotations

http://www.traderunner.pro/finding-your-harmonic-rotation/

Ideas and walk through s  for various stats

http://www.linnsoft.com/homework

Leave a Reply

Your email address will not be published. Required fields are marked *