exp system

[exp]

Gambler's Ruin problem and Practical Trading Applications:
http://www.math.usu.edu/~koebbe/GR/GamblersRuin/GamblersRuin.html

The Gambler's Ruin Simulator:

Let's assume that the gamblers start with $50 and will gamble until either $100 is reached or all the money is lost. Further assume that each gamble has a 0.6 probability of a $1 win and a 0.4 probability of a $1 loss. Let's assume that there are 100 gamblers and that they will stop after 250 plays (gambles).

To simulate 250 plays under these conditions enter the following numbers in the boxes below and press simulate:
50
100
0.6
100
250

This exercise will illustrate the chance of doubling one's money (from $50 to $100) without going bust (from $50 to $0) within 250 plays under the assumption that probability of a win is 0.6 and that win/loss is always $1 or about $1/$50=2% of the total amount. The results obtained for 100 gamblers indicate statistical distribution of the possible results.

This scenario is a good approximation of a trader trading a stock market index using technical analysis so that a win probability is 0.6 or 60% and the average daily gain/loss is about 2%. The simulation shows the chances of doubling one's money without going bust in 250 trading days (1 year).

Simulation results are very encouraging under these assumptions in that there is basically always a sizable gain after 250 plays, often reaching the desired $100. This indicates that 0.6 is a sufficient win probability to achieve good returns if one can keep single days wins/losses to about 2%. In fact, even 0.55 win probability is good enough for similar results. Similarly, changing the initial amount from $50 to $25 and thus win/loss percentage to about $1/$25=4% does not affect the results. Note also, that single day win/loss of 4% decreases to 2% as the amount grows above $50 to $100 (based on $1 single day win/loss).

So it appears, that the win probability is the KEY assumption and NOT the single day win/loss as a percentage of the total account. Therefore, as long as one can achieve win probability somewhat over 0.5 while keeping single day win/loss percentages balanced, the trading results should be superior.

The practical advice for every trader is to review one's past record in order to calculate
(1) percentage of winning days
(2) average 1 day percentage gain
(3) average 1 day percentage loss
to see whether
(1) > 0.55
(2) > (3).
If not, these two conditions should become the most important goals to be attained in trading.