Forex: Statistical Probability and Law of Independent Events

Okay, someone who purchased my FX Power Hedge System (www.FXPowerHedge.com) just asked me a question I've now heard about 50 times, so I want to put up a post that answers it. Maybe save myself an e-mail or two, cause I work with everyone who buys the power hedge system -- but a lot of the questions people ask are the same.

Here's the deal.

With the FX Power Hedge System, the default settings on the auto calculators you get create a 97% statistical probability that every trade will win -- so you earn profits. But, there is still a 3% probability, however, that you could LOSE a trade.

Now, it MUST be noted that traders who work with me as they learn the system (and via materials also sent when the system is purchased) ALSO learn a methodology to ELIMINATE even this 3% chance of losing a trade. BUT, this takes more practice and possibly up to 30 days worth of work on a demo account to master in order to get to the point where you do NOT use fixed stops and limits.

So, we do not have to always live with just the 97% probabilities (although that's pretty good). The system can be used as an indicator and you can elevate your trading above what I call the initial basic fixed stop/limit mode of trading. Sorry to ramble -- that's the second evolution of the system that I teach FX Power Hedge Traders. The initial stuff is what I want to answer for brand new traders.

The fixed stop/limit mode of FX Power Hedge is what everyone does on day one (except for veteran traders who "get it" and go into the second evolution of the system day one. It's the fixed stop/limit mode that has the 97% success rate on every trade, but lots of traders ask the following question.

So, how great is your system if you LOSE a bunch of pips on every 3 out of 100 trades?

No doubt, the way this system works, if you lost 3 out of every 100 trades it would be extremely costly. There's high risk for loss if you do NOT implement money management strategies manually in the event of one of those statistically remote 3% reverses -- and they CAN happen. (But only 3% of the time).

HERE IS WHY YOU ARE NOT DESTINED TO LOSE 3 OUT OF EVERY 100 TRADES DESPITE THE 97% STATISTICAL PROBABILITY OF WINNING, AND REMAINING 3% PROBABILITY OF LOSING ON EACH TRADE.

It is called the Law of Independent Events. In other words, every individual trade is INDEPENDENT of the results from the prior trades. There is no cosmic force that mandates you are destined to lose 3 trades out of every 100. The law of independent events says, for example, that if you flip a coin and get heads 100 times in a row, then your statistical probability of getting heads OR tails on flip number 101 is 50/50. The probabilities are the same after 100 flips as they were on flip number one.

I have also heard the argument that, well, "statistics will catch up to you...so if you make 1000 trades, you'll lose 3%...it will ultimately even out to the statistics."

In pure theory, this actually is true. But, what we've found in over 10 years of back testing is that this doesn't come true over the volume of trades we can make in that time frame -- MANY thousands of trades. We haven't been able to get a back test EA built on this system to perform "millions" of trades, so maybe that's why we're not seeing it. What we're seeing is closer to 99% success with what a software engineer calculated as the 97% statistical probability.

I know that may not make sense. But this system has gotten well beyond my own personal capabilities in mathematics.

After a week or two, traders who start with the very basic fixed stops and limits implementation (which, by the way, actually is how I initially built my own wealth at first in 2006 -- a very trend friendly year)...after a couple of weeks, traders learn the money management/risk reduction techniques I teach. And they escape even the 3% chance of losing large profits. That is where I want people to get...but you have to learn the basics before I can teach you the next evolution of the system beyond fixed stops and limits. (I hope this makes sense.)

Since I mentioned back testing, I should also tell you that we have an EA (actually two EA's) that implement the FX Power Hedge system. BUT NONE OF THEM WORK!!!! The mathematics are too complex for an EA or something is wrong. Bottom line, I don't know how to build an EA but I know the two we have don't work.

Manually trading the system allows us to vary stop ranges with some mathematical calculations incorporated into the auto calculators my traders get, so we can eliminate most of those losses. This is then combined with money management techniques and a more sophisticated no stop/no limit methodology where the FX Power Hedge serves as an indicator, and you make more pips while risking the loss of FEWER pips even if things go wrong (the remote statistical probability). So, the system works for manual trading, but we can't get an EA to incorporate the flexibility required to truly achieve success AND safety on every trade...while maximizing profits.

End result is that ANYONE manually using the FX Power Hedge System WAY outperforms anything we can get built into primitive conventional EA software. (That said, if anyone out there who has bought my system wants a copy of one of our EA's...or both of them...I'll send them to you. Send me a copy of your receipt in the trader-only e-mail address, and I will send you the EA's to fool around with no charge. Hey, maybe YOU can figure out what no one else has done yet. I'd be more than happy for us to be the FIRST to come up with an EA that actually produces consistent profits. So far, I've yet to see an EA that produces profits on a long term consistent basis. We buy them all, and they all lose money in the long term...so far.)

What we're hoping to do today is develop a software program that would run in the background and calculate the combination of price movement and time variables (the only absolute real time truths we ever know about forex), and feed information to a conventional EA installed inside an MT4 platform. I have three software engineers who have been working on this software. So far, we don't have it. We don't have anything that will work...YET! (But we are always hopeful.)

Until then, we must trade the FX Power Hedge System manually, and (frankly) that has been very successful for myself, my friends, and every trader who has actually implemented the system properly utilizing the advantage of my mentoring in the early stages.

Bottom line, and to answer yet again that original question I wanted to address once and for all: the FX Power Hedge wins 97% of all trades at the default settings we send to everyone in their auto calculators included when you purchase the system (www.FXPowerHedge.com).

Because of the Law of Independent Events (Google it for more explanation if I have not been clear)...due to the "Law of Independent Events", you are NOT NOT NOT destined to lose 3 out of every 100 trades just because the statistical probabilities show a 97% probability of winning and a remaining 3% of losing on every trade.

By our observation, it would take many MILLIONS of trades to ultimately get to the point where these statistics do ultimately conform to "statistical theory".

WAY before that time, you should easily have increased your account beyond the point where you're vulnerable to a loss. Indeed, you can build an account from $500 to $15,000 in the average 45 days or so with the FX Power Hedge System in the basic fixed stop/limit mode for beginners. And, after you reach about $5000, then you are immune to the dangers of a 3% statistically remote loss on any one or two trades. That's the safety margin you need if you just want to continue using fixed stops and limits. No worries. You then have enough equity to endure a loss and stick with the basic program. (I still believe the more you trade the power hedge system, the more likely you will see the advantages of using it as an indicator, implementing money management techniques, and also capturing more pips per trade with no stop/no limit mode. But, it's all up to the individual trader.

My first lesson is, however, trust the statistics. We didn't just make them up. And, above all, the integrity of the 97% statistical probability of success applies to EVERY single trade. I don't know how many things you can undertake in life that have a 97% documented statistical probability of winning, but I'm in favor of trying every single one of them. Those are pretty good odds, especially in forex where even the best professional technical traders openly acknowledge that they win only 40% of their trades and make money through money management alone.

Sparks