by Rick Ratchford
Editor’s Comment : Sorry to bring up an opposing point of view, Rick Ratchford and C J. Casebeer, but is this really correct information, in gambling, betting or trading situations? The issue is, if there is a continuous advance for say 9-days in a row, does this mean by day-10 the chance of another up-day is 10% or any other number less than 50%? Or is the chance of one more up-day on day-10 still 50-50, as many statistical people say is true.
P.S. Another example is if flipping a coin and it comes up tails say for 9 straight tosses, does this mean the chance of it coming up tails on toss number 10 is very slim, or is it still a 50-50 possibility on flip-10?
Although each day left by itself could be considered a 50/50 proposition, the historical facts show that moves in any particular direction will reverse trend in a matter of days. And if we were 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 go down, etc. Not if you want to 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. In trading, with proper preparation and understanding, you have control of your odds. In 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 like a 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 storeowner is not considered gambling. Same with our purchasing and selling futures.