Probability is the study of random events.. That is, of those events that can have different results and that cannot be predicted with certainty. As we know, sometimes life puts us in situations where we don’t know what is going to happen. For example, when you buy a lottery ticket, when you flip a coin or when you ask a platonic love on a date.
We call these cases random events, because they can have several results and we cannot be sure which one will come out. To measure how likely each outcome is to come up, we use probability.
Probability is a number ranging from 0 to 1, or 0% to 100%, that tells us how likely something is to happen. The probability, for example, that you will win the lottery is very close to 0, or 0%, which means that it is almost impossible. The probability that a coin will come up heads or tails is 0.5, or 50%, which means that there is an equal chance for both. And the probability that your crush will accept your date… well, I don’t know that.
Are you interested in the world of trading or investment? Well, it is not enough to have luck or intuition. Sooner or later, you have to learn some probability. The theory of probability is the science that studies things that cannot be known with certainty. Like what will happen in the markets, which are very unstable and change all the time. The Bitcoin market, in particular, is a highly unpredictable roller coaster of emotions. Probability helps you measure risk, estimate the chances of winning or losing, and make better decisions. But it is not an easy science to master. Sometimes probability surprises you and contradicts you. Studying the probabilities of something does not make you a fortune teller. But it can give you an idea of the trend that something can follow in the long term. For him traderprobability is a point of orientation.
The law of large numbers is one of the fundamental laws of probability theory.. This law says that, if we repeat a random experiment many times, the average result will get closer and closer to the theoretical expected value. For example, if we toss a coin many times, the proportion of heads and tails will get closer and closer to 50%. This law allows us to estimate the probability of an event from the empirical observation of its relative frequency. Starting with this law is an excellent way to start learning about probability, since it shows us the relationship between theory and practice, and helps us understand the behavior of random phenomena in the long term.
The law of large numbers is a very interesting concept. The law of large numbers says that in the short term, the results are random, but in the long term they will be close to hope. Confused?
Imagine that we flip a coin 10 times and we get 6 heads and 4 tails. Could we say that the coin has a 60% chance of coming up heads and a 40% chance of coming up tails? Of course not. Intuitively, you know this because you’ve only flipped the coin 10 times. But, if you were to flip it 1000 times, it would be closer to 50% heads and 50% tails. And that’s what the law of large numbers is all about. In the short term, your results in the trading they are random. And only in the long run, after a fair amount of trading, will your system align with probability.
Suppose that after weighing a set of subjective and objective factors, we have determined that the timing uncertainty is too high. That means anything can happen. In this case, the probability that the price of Bitcoin will rise is 0.5 or 50%. And at the same time, the probability that the price will fall is also 0.5 or 50%. That is, thes chances are even. Which gives us a mathematical expectation of 0. In other words, in this game, you neither win nor lose in the long term.
Now, due to this high uncertainty, suppose we decided not to participate due to the lack of a clear trend. But, suddenly, the price rises with great aggressiveness. Are we wrong? Did our analysis fail? Which really means that random events are highly erratic in the short term. And probability works on large numbers. So, for a trader Basing your strategy on probability is not about not failing in the short term. It’s about getting it right on average in the long run.
The theory of probability helps us make decisions in situations of great uncertainty and chance.. It teaches you how to predict what can happen to the prices of stocks, currencies, bonds, cryptocurrencies and other products that are bought and sold. With the theory of probability you will be able to: Know how much you can win or lose on average if you follow a certain strategy. Calculate the chances that the market will go up or down, break a level or make a nice drawing. Measure the risk and profit of each operation you make, that is, how much you can lose if you are wrong and how much you can win if you are right. Adjust your buying and selling decisions based on probabilities and expectations. Use mathematical tools to review your past results and improve your future performance.
Brief example: The expectation is the average value that is expected to be gained or lost by doing something that is highly dependent on chance, such as trading of Bitcoin. It is calculated by multiplying each possible outcome by its probability and adding everything up. For example, if you risk 1% and seek to earn 2% (risk/reward=1:2) with a 50% hit rate, your expectation is:
(0.5 x 0.02) + (0.5 x -0.01) = 0.005
This means that our mathematical expectation is positive. If the expectation is positive, your trading It is profitable. If it is negative, you trading he is loser The mathematical expectation only tells you what happens in the long run, not what happens in each operation.
The successful trader does not allow himself to be carried away by panic or euphoria. The successful trader follows the path of probability. Probability allows you to analyze the market with data and not sentiment. This way you can adjust to the different situations that arise and choose the best option for your pocket.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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