Probability computation on Algoo Strategies.

It is a known fact that investing carries a certain amount of risk. However, determining the level of this risk can be very hard with so many calculations and statistics going on in the background. To help investors know the risk that comes with using an Algorithmic trading strategy, Algoo Strategies uses probability computation to calculate the risk attached to a strategy and help investors when selecting a strategy.

To calculate the risk attached to an investment, first, it is necessary to define what an investor is trying to achieve. His goal might just be gaining maximum profits with minimum risk or minimal returns but with minimal risk. Either way, before choosing an Algorithmic trading strategy, it is very important for anyone interested in investing to know the outcome of his investment beforehand. But this outcome can only be determined by the outcome of all scenarios of a strategy. Thus, knowledge about probability is very important.

Creating a strategy based on the outcome of all scenarios of a strategy is called statistical analysis. To do this requires prior knowledge about probability. Knowing that investment can have up to 1,000 possible outcomes, it is necessary to determine the probability that each possible outcome will occur. The probabilities of a set of outcomes can be determined by their frequencies in specific sets. For example, there are 26 letters in the alphabet and each letter has 3 possible positions (i.e., [A, B, C]) and you want to determine if it is more likely for [A] or [C] to be the beginning of a word (1). In such an event, there are 26 possibilities for this letter i.e. 3x3x3=26 possibilities. And the probability for this to occur is 1/26.

After calculating the probability of each possible outcome, an investor can determine what he can gain. For example, if an investor has $100 and wants to maximize his profit, he has the option of either buying 1 or 3 stocks (assuming he cannot buy fractions of stocks). There are 4 possible scenarios for this scenario (2) below - [A], [B], [C], and [D]. The three possible outcomes are profits while the other three are losses. For this situation to occur, it has two probabilities (3).

Thus the average profit is the profit of scenario 1 (100 - 50=50) which is $50. It also has two probabilities (3) of $30 and $60. Thus, the average profit is $30.

The risk attached to this investment can be determined by calculating the loss if one of scenarios 1 through 3 occurred. For example, if an investor expects to lose $1,000 per year on his investment, he must consider all scenarios. This can be represented as below:

For this case, scenarios A and B are most likely to occur so the loss will most likely be $1,000. This would result in a loss of 0%. Scenario C has a probability of 50% which results in a loss of $500. Lastly, scenario D has a probability of 10% which results in a loss of $100. Thus, the average loss is 0%. Thus, the investor should only buy 1 stock for this investment because it has an expected minimum loss. The probability attached to this investment is also one since the other 3 scenarios are "low" probabilities.

After calculating the risk attached to each scenario of an Algorithmic trading strategy, Algoo Strategies uses this information to decide on what level to set their risk factor for this strategy. This will allow investors to know how much they can lose before deciding if they want to invest or not.?The probability computation used on Algoo Strategies uses a scale of 1-10 to show the risk attached to a strategy, with 1 being very safe and 10 being very risky. Investors can select a strategy depending on their level of risk tolerance.