Maximal Strategy Questions


Firstly thanks very much for your very thought provoking article.

I’d always thought I might be placing my stops too close but how close is too close? How far is too far? I think your article gives a possible answer. I like to understand the maths behind the reasoning before putting it into practice hence the questions.

Anyway here’s what I think is happening, let me know if I’m off track, which will probably be soon…

1) Compute the volatility, sigma (pips). This is the std dev of the difference between high and low for each bar (eg. M5), for a time period eg. 24Hrs. The period length is somewhat arbitrary…

2) If we assume no drift for the distribution of the random walk, mu (mean) = 0

3) Std dev, of the random walk at time t (num bars), = sigma * sqrt(t)

3) At time t, convert price to a Z score, where n=num pips gained, z=n/(sigma * sqrt(t)).
eg. Probability of price>+40pips, at time t, P[Z>+40pips] = 40 / (sigma * sqrt(t))

While P[Z>0] = 0.5 and P[Z>(some negative value)] > 0.5, I guess my question is how P[Z>(some positive value)] could be 82%, eg. P(TP)=82%, or is that not what that actually signifies/implies?

I realise that the above does not take into account the possibility of the num of pips gained/lost prior to time t, which could hit TP or SL, but simply P[Z>n], only at time t. But I thought that you dealt with that later ( P(SL only hit), P(TP only hit), etc.) and not at this point. If so, or not so, how do you derive P(TP) for your maximal curves?

Posted by byo2000

  1. if the formula is Z SCORE = pips gained/ (volatility* square root of time)
    How do you get probabilities <50%?, as there is no possibility for negative values, how is it possible to get a z score <0?

  2. Hello Fellow Forum Users,

    Just checking in to see if there is any activity here; I am about to purchase the SLTP Maximizer and would like to connect with some other users for “use assistance” as well as experience with the product.


  3. Unfortunately I can’t use your file, have an old version of excel. I only did this for one TP value, was trying to match your results. They are close, but using a 15bp sigma. Its ok, I think I understand the method.

  4. Your numbers do look reasonable. Did you generate these for a whole series of curves or just this one TP value? If you can upload an excel chart here please with all curves that would help.

    As for the example in the article, I would need to dig into the spreadsheets and figure out exactly the vol that was used to produce those curves. But you can also use our spreadsheet to match and compare your figures.

    • i’m unable to edit the excel file, by that I mean that I can’t put the data in the calculator. it shows that the sheet is protected and requires password from me. how to exactly use it ?

      • A password isn’t necessary to use the spreadsheet. From what you say it’s likely you are trying to overwrite protected formula cells. Please check the FAQ page for more help.

  5. Hi Steve,

    This are the probabilities I get for random walk with no trend, for various hours and 40pips TP. But I got this by using ~15bp 5minute volatility, the article says the 5min vol is ~10bp. I was wondering if you could confirm the exact volatility you used for the curves?

    hr P(S>TP)
    1 0.2898402
    2 0.4541886
    4 0.5966454
    6 0.6656599
    12 0.7599524
    18 0.8029973
    24 0.8289543


  6. Thanks for that, I read it – it was in one of the links of the article you had linked to. The maths was what I figured from it.

    I still don’t understand how you figured P(TP)=82%. Could you please explain?

  7. Yes I agree it’s better to understand the background, using these methods without that is very risky.

    If you are interested I recommend taking a look at some of the papers at Duke (e.g. this one) – they have a lot of resources there on this subject.

    • Firstly, thanks for your amazing article.
      I do not understand why the probability of the Price being above (or below) the current Price/starting point could be >0.5 when we assume a random walk model with equal probability for both events.
      could you explain it? Please, I am very interested in this topic. I did not find any answer in the article you provided either. Also, How do you get the maximal curves?

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