No doubt, mathematic skills are very useful for successful trading, but you do not have to be a PhD in Applied Math to be able to use a simple candlesticks chart combined with a mathematician strategy. The Mathematician Strategy is based on the theory of probability. The most popular visualization of asset prices is the candlestick chart. Its popularity is due in part because it is easily interpreted and can show patterns to support decision-making in forex trading.
Mathematician Strategy Explained
A simplified view of probability theory relative to trading goes something like this: A prolonged sequence of futures (or FX, equities, cryptos) trades with a fixed $1000 profit target and a fixed risk of $1000 (normalized for underlying trends) should produce profits in 50% of the trades.
Trading experience proves that the number of candles of the same color never exceeded eleven. Why? Here is an explanation. Since buyers and sellers operate in the market, thus, any serious impulse in one of the directions can be squelched by opposite players.
Moreover, statistics show that the probability of a price reversal after three candles of the same color is 50%. Even more, the probability of a price reversal after five candles of the same color is 75%. Exceptional situations create eight, ten and twelve candles of the same color.
How to trade with the “Mathematician” system?
In terms of execution, the mathematician strategy is simple: a trader waits for the formation of three candles of the same color to buy a contract in the opposite direction. The recommended algorithm:
- CALL after three red (bear) consecutive candlesticks.
- PUT after the three green (bull) consecutive candlesticks.
The expiration period should not exceed the formation time of one candle.
The screenshot below shows the strategy in action:
Every three candles of the same color are marked with black rectangles on the chart with an hourly timeframe. Green arrows indicate when the contract was purchased, and the deal was profitable. Red arrows indicate losing positions.
As you can see, seven out of nine purchased contracts were profitable.
Application of the Martingale principle with the “Mathematician” strategy
To minimize risks, many traders use the Martingale principle. The Martingale system is a system of investing in which the dollar value of investments continually increases after losses or the position size increases with lowering portfolio size. Martingale strategy is about doubling your trade size when you lose. The theory is that when you do win, you will regain what you have lost. On the other hand, an anti-Martingale strategy states that you should increase your trade size when you win. Everyone has a limit to their risk capital. The longer you apply a Martingale trading strategy, the greater the chances are that you will experience an extended losing streak. Depending on your mindset, you might find this an off-putting proposition. Needless to say, the Martingale strategy does have its advocates. Now, let’s look at how we can apply its basic principle to the Forex market.