In a room of just 23 people, there’s a 50-50 chance of at least two people having the same birthday. In a room of 75, there’s a 99.9% chance of at least two people matching. How is that for an introduction to probabilities?
For traders, probabilities are the most important thing to understand, and I truly believe that understanding this concept will positively impact your trading results. The correlation between understanding your numbers and having confidence is extremely high.
Certain things in life aren't that obvious at first sight. By glancing over the birthday paradox again, you might think, wait you have 365 birthday possibilities and 23 people, this cannot be a 50-50 situation.
Well, it is all about where you put your aim...
If you would say that the odds of two people being born on June 11th (my birthday) is 50% in a group of 23 people, it would be crazy. When you generalize the statement by asking the same question without mentioning a specific date, you have a much higher chance of finding two people who are born on the same day. The fact that every single individual is compared to another individual makes this paradox work.
The point of this post is not to explain how this works with math, you can do it quickly for yourself if you want to. What I am trying to say is that the way you formulate your statement has a big impact on the probabilities.
When we look at trading quickly we can formulate a statement similar to the birthday paradox. If you take an asset and analyze the probabilities of it going up or down, your chances are 50% for either. However, when you open a long position and place a target. Your chances of price reaching your target are not 50% anymore. Now more variables come into play, that ruïns your original probability.
As a trader, understand how probabilities work, and you'll be able to put the odds in your favor. Speak to you soon! Kind regards,