Stocks & Commodities V. 35:06 (14–19): Gain Probability Index by Mike B. Siroky, MD

Gain Probability Index by Mike B. Siroky, MD

You have to know (or estimate) your probability of gain and your payoff odds before entering a trade, but how do you estimate gain probability and payoff odds? Let’s find out.

Imagine a roulette wheel that has six red slots for every four black slots. If red comes up, the payoff is $3 to $2 while if black comes up, the payoff is $4 to $2. Should you bet on red, black, or not bet at all?

WHAT'RE THE ODDS
With the payoff information you know the payoff odds. They are 3:2 and 2:1. But you also need to know the probability of gain on each spin of the wheel and since there are six red slots out of every 10 slots, the probability of red — p — is 0.6 and the probability of black — q — is 0.4. Under these conditions, if you were to bet $2 on red 100 times, you would place at risk $200 and you can expect to win $1.00 x 60 wins and lose $2.00 x 40 losses for a net loss of $20.00. You can say that your expectancy for red is -10% ...