A Strategy for "Winning by Design" Guided by Probability and Payout Ratio

1. Why a "Logical Foundation" is Essential for Trading Many FX traders lack a clear basis for their orders, making their chances of success ambiguous compared to gambling. In horse racing or roulette, the winning probability and return (payout) are known in advance, but in FX, these are often unclear, causing decision-making to fluctuate and leading to losses. To invest with confidence and generate consistent profits, a mathematical theory built on three elements—logical grounds, clear goals, and reproducibility—is required.

2. Introducing "Probability": Measuring Edge by Fixing the Exit In my theory, probability in FX is defined as follows:

• Assumption: In an order with no inherent edge, the probability of winning or losing is inversely proportional to the profit/loss range.
• Example (USDJPY): The probability of winning 0.7 yen and the probability of losing 0.7 yen are both 50%. Extending this, if the take-profit is 1.0 yen and the stop-loss is 0.5 yen, the winning probability becomes 33%.

Based on this logic, the closing condition is set to a fixed value: "Entry Price ± α". This provides three benefits:

• Building Confidence: The expected value (probability × profit amount) is clear at the time of entry.
• Improving Reproducibility: By eliminating complex exit conditions, backtesting results are more likely to be replicated in live trading.
• Statistical Advantage: Common methods like "waiting for a peak before closing" often carry a statistical handicap from the start.

3. Introducing the "Payout Ratio": An Indicator to Prevent Net Loss from Fees The payout ratio in FX is the percentage of profit after considering the spread (transaction cost). This ratio varies depending on the trading conditions.

• Variable Examples (Spread of 0.01 yen): A trade with a 0.5-yen range has a 90% payout ratio, but a 0.2-yen range drops it to 75%.
• Target Value: To generate stable profits, one should aim for a payout ratio of 90% or higher.
• Optimal Settings (USDJPY): A price range of α = 0.6 to 1.0 yen makes achieving a 90% payout ratio easier and more efficient. A 1-hour time frame chart is best suited for targeting this range.

4. Practice: Constructing a Profitable Trading Logic When building a trading logic to put this theory into practice, focus on these three points:

1. Standard Technical Indicators: Using indicators that many people monitor increases market reproducibility.
2. Stable Upward Performance: Aim for a logic that shows a steady upward trend in backtesting. Inconsistent results (high volatility with "peaks and valleys") cannot be relied upon for stable profits in live trading (actual operation). Furthermore, refine the logic until the average profit is at least double the profit required to achieve a 90% payout ratio. This "double" requirement serves as a safety margin for the expected reduction in performance during live trading.
3. Observation Period: After completing backtests, do not begin live operation immediately; instead, observe for a set period. This confirms there is no discrepancy between the backtesting environment and current market conditions.