Coin flip trading Myth. Some examples show that if you limit your losses and have good risk to profit ratio, like 1:3, you can make money with stock selection entries that are selected by a coin flip.
This is a myth and it doesn’t work. Usually because:
-setting 10cent stop loss and waiting for 30cent move to exit is not a coin flip. It’s much more likely to hit the stop, compared to reaching the 30cent profitable exit. (10cent exit and 10cent stop would be a coin flip).
-most probably it’s 3x more likely that the stop is hit before the exit. So this method doesn’t make any money.
Even if the wins are 3x as large as stops, you make much more stop loss hits compared to wins.
-This is even more worse if the stop loss is placed within the daily ‘noise’, so 10cent move is very likely, as 30cent move would need a real ‘change’ in value. Stock would have to move positively to your favor to reach the exit, but the stop
could be reached without the stock really moving. it would hit it with just market fluctuations within the noise.
The lesson of the coin flip is that entry probability is not the whole trade probability, The exit and stop strategy changes your probability. You can take 50/50 entry method and ruin it with too tight stops that are hit by noise before the trade can actually work. The whole probability is possible 20/80 with too tight stops.