# Is It Possible A Coin Which is Being Flipped Is Heads or Tails Because Like Magic The Coin Has A Memory of Its Own

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Commodity Traders Club News Editor's Comment: As ridiculous as the above headline sounds many traders act like that's indeed possible, if not likely. For example, the trader thinks if the coin landed on heads say 4 times in a row (or the market was higher 4 straight days), the chance of it coming up heads on toss-5 (or the market going up again on day-5) must be about 20% or so. The likelihood of a flipped coin magically having a memory is applicable in gambling, betting and trading situations.

The issue is; assuming there is a continuous market price advance as an example 9 consecutive days, does that necessarily mean on day-10 the chance of one more up-day is just 10% (or any other percentage under 50%)? Or is the actual chance of one more up-day on day-10 still a 50-50 chance, as statisticians say is in fact the case. If you are flipping a coin and it comes up tails say 9 straight tosses, does it mean the chance of it landing on tails on toss number-10 is very slim, or is it still a 50-50 possibility of tails on coin flip #10?

Today's date of is a good time for us to study the coin-toss memory subject. Although each day left by itself could be considered a 50/50 proposition, the historical facts reveal moves in any particular direction will reverse trend in a matter of days. And if we're to describe a continuous move as being made up of at least x-number of days, then 50/50 would not apply at all.

Consider: If each day was 50/50 for a continuous move to end or change, could you possibly have a continuous move start everyday? Today we flip and go start our continuous move down, tomorrow we flip and go up, the next day we flip and moves down. Not if you call it a Continuous Move.

One-day moves are not continuous. Continuous moves are made up of several days in one direction. When they end, they move in a different direction. Thus, each day cannot be a 50/50 chance for a continuous new move.

Naturally, the longer a move goes in one direction, the higher the probability that it will soon end. When probability is dynamic, in that it increases with time, it cannot be described with a fixed or static probability, such as 50/50.

This is why trading is not the same as gambling and betting, though there are similarities. In futures trading, using a trading system based on sound trading principles and proven techniques, you have control of the odds. However, in wagering and casino gambling the house rules.

Consider it another way. Any good salesperson knows that he/she is likely to get several No's before they get a Yes. It is a numbers game. Each 'No' that the salesperson gets brings him/her that much closer to getting a 'Yes'. Therefore, the PROBABILITY of getting a 'Yes' with the next customer goes up. It does not remain 50/50.

A trader is similar to a store merchant, who has to decide on inventory to sell. If he chooses the right inventory and amount, that which ends up in demand, he makes money. If his homework is faulty and he orders merchandise that very few want, he loses money. The risk in business, being a store owner is not considered gambling. It's basically the same with the business of buying and selling futures markets.

Some article content submitted by Rick Ratchford of ProfitMax Trading. The remainder of article was contributed and/or edited by website editor.

You have to assume you are right about market direction (up or down) and test to see the required risk. I have a printout on my wall with "Average Risk" "Optimum Risk" and "Alternate."

These are the levels of trade risk corresponding to different percentages in various futures. i.e. trading gold gets an average risk of \$34 which clicks 58% of the time. An optimum risk of \$101 for 97% wins and Alternate risk of \$1, which amazingly manages to achieve 40% wins, based only on days when there is a zero adverse move away from the opening price.

As to methodology, we tested in a bear market and may get different results in a Bull market. At that time we were thought to be in a Bear market. We used between 10 to 120 trades in each futures market - the different numbers were because we selected trades with both high volume and high liquidity (based on open interest). Some commodities (like oats and rice for example) have very poor open interest and thus had fewer meaningful samples to test.

It's not a good idea to risk more than you need to, unless you are wealthy with basically a bottomless commodity broker account. For instance, my sampling of bean oil was 115 trades and the average risk to win was \$40, which made \$4,648 with 71 wins, (62%). \$500 stops made \$9,498 but so did \$250 stop-loss orders.

In fact, the smallest stop required to make the highest money of \$9,498 was \$211, which we listed as optimum. As it happened with this sampling, \$211 stops brought in 100% wins. The difference here was \$4,600 in risk to gain \$4,648 (average) and \$24,265 to gain \$9,498 with the optimum stops. Alternate risk of \$12.50 costs \$1,437 in risk for \$3,644 in gain.

Major differences become apparent here. If you consider the amount you risk on stops as investment money, the return on investment for Alternate stops is respectable, prohibitive on Optimum stops and the healthiest for your trading account with the Average stops.

All this assumes you have the movement direction correct and does’t address commissions or fees. When you factor in commissions and fees, the study shows there are some commodities to avoid - at least during a bear market.

An interesting result of this testing was an \$11 (or \$101) stop loss is a large percentage jump better vs \$10 (or \$100). This being because it's slightly different to a natural number, selected by various means by most people.

If corn supplies and fundamental market analysis result in a corn price of \$206-1/2 you can’t use a \$31 stop, the way my printout shows for an average. You have to round it up to \$37.50, because of the increments in which grains trade. Having this printout on the wall does take the guesswork out of stop placement, but I am still influenced by support and resistance lines.

It can be beneficial to study both methods of stop-loss order placement, knowing other position traders and day traders also know well how to read bar charts too and edging the stops just a little more than the chart indicates. If there is a large disparity between the 2 methods, we often look for other trade opportunities. Looking back at days end, I seldom regret standing aside, with no open trades.

You will get Natures Law Secret of the Universe book for only \$57.00 (includes S&H). Natures Law is a very rare and hard to find work that can help you greatly.

Fibonacci numbers may be used in conjunction with other techniques to trade successfully. For example, Fibonacci numbers can be used to gauge retracements against the trend for trade entry purposes, for placing stop-loss orders or for trade exits at a target price.

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