Ideal trader hindsight as a pretrade filter

Discretionary choices and encoded systems

A discretionary path requires continuous choices from scan through sizing, management, and exit. A finished system encodes those choices in advance.

The ideal trader as a scoring path

The evaluation construct is a hypothetical actor allowed to place orders in the past at turning points. That actor extracts the largest available move after ignoring swings smaller than a chosen minimum target.

The archive calls this path the ideal trader. The chosen minimum target is the control parameter, which also sets the stop distance and the unit of profit measurement. Any price swing smaller than the control parameter is a noise threshold. It is treated as untradeable and ignored.

The profit distribution

On that construct, qualifying profits are described as exponentially distributed, with standard deviation equal to the control parameter and mean equal to twice that parameter. The smallest qualifying wins are therefore the most frequent. That claimed shape is the profit distribution: larger wins are rarer.

The accompanying probability chart is read as about a 60 percent chance that an ideal-path profit is no larger than twice the control parameter, and about a 40 percent chance that it exceeds the control parameter.

Matching a planned trade to the path

A planned trade is scored by matching its stop, entry lag, and target to the ideal path. Entry lag is how far the planned entry sits from the matching ideal turning point, measured in units of the control parameter. Target multiple is the planned profit distance expressed as a multiple of the same control parameter used for the stop.

When the target equals the stop and the entry sits two stops from the ideal turn, the implied chance of reaching that target is 14 percent. That reading follows because the matching ideal profit must be at least three control units.

The decision matrix

A pre-entry decision matrix lists win chances for combinations of target multiple and entry lag. A trailing-stop entry one control unit from the ideal turn is assigned a 61 percent chance of a half-stop win and a 37 percent chance of a one-stop win.

When the first target is missed

If a trade misses its target, remaining smaller profits are scored by mapping the realized profit onto a larger ideal-path profit and rereading the same matrix with the target-plus-one substitution. That remapping is the trailing-stop map, so an unfinished trade still has a probability estimate.

How the archive frames low win chances

The relatively low win chances in that matrix are presented as typical of trend-following setups. They are meant to be judged against payoff size and competing opportunities, not as a reason to reject every such trade.

Scoring nontrending swings

The same matrix can score nontrending swings by swapping roles. The control-parameter stop becomes the profit target and the former target becomes a fixed stop. That mean-reversion swap keeps nontrending swings on the identical scale.