Conclusion to statistics posts
As cliff notes to previous few posts on statistics. I have made the following conclusions that I follow in my own trading. You may disagree with them, and apply other thoughts, but they have been instrumental in driving the way that I make money. There is a lot more in depth that you can go into - there are various books and online resources that can help. There is also software that is a shortcut for calculating odds but I recommend that you understand the principles behind them rather than just feeding your results into a computer. The interpretation (as in anything not just statistics) is very important if you are going to draw a conclusion. The conclusions I drew are this:
1. Losing an account/blowing account is far more probable that what win rates and loss rates indicate (see permutations)
2. Survivability grows accounts (with constant compounding) more efficiently than high risk systems
3. Despite systems repeatedly having an edge over the market, single systems or techniques are short lived and need to replaced to maintain an edge
4. Population studies show us other factors outside of mere win/loss rates and statistics influence profitability and drawdown and that these factors are very significant. Any trading should be taken on the side of caution.
Of course statistics are necessary to tell you whether your system will work or is worthwhile continuing with. Its incredibly important with technical trading but it equally tells us that winning 80% of the time with 2:1 win rate is not all there is to it.
My trading system is based a lot on surviving as this is what makes money as an investment.
Why have I emphasised this point? The issue is that even if you have a 75% win rate system with a 2:1 reward/risk ratio (which no one I have ever seen has achieved) it will still eventually blow up given enough time. If you trade 50% risk on that system it will blow up very quickly. If you trade 1000 times per day, it will blow up in a matter of months. No matter what system you use, no matter how great it sounds, if you do not understand that all systems have finite lifespans in the matter of trades that are rapidly shortened by trading many times per day or by increasing risk per trade, then you have missed the point. I have also made the point of looking at your own statistics and relating that to the theoretical statistics (either given by a guru or by backtesting) and questioning why there is a discrepancy. Is there something you are doing wrong, or is the fault of the system itself?
You might ask - why have I spent several posts discussing what I could have posted in one post - its because it serves to illustrate and emphasise certain points. You can quibble about small points but rather than discuss those I want to put forward my general ideas and I hope you find them useful.
This concludes the 'statistics' part as I want to move onto talking about other subjects in further posts
As cliff notes to previous few posts on statistics. I have made the following conclusions that I follow in my own trading. You may disagree with them, and apply other thoughts, but they have been instrumental in driving the way that I make money. There is a lot more in depth that you can go into - there are various books and online resources that can help. There is also software that is a shortcut for calculating odds but I recommend that you understand the principles behind them rather than just feeding your results into a computer. The interpretation (as in anything not just statistics) is very important if you are going to draw a conclusion. The conclusions I drew are this:
1. Losing an account/blowing account is far more probable that what win rates and loss rates indicate (see permutations)
2. Survivability grows accounts (with constant compounding) more efficiently than high risk systems
3. Despite systems repeatedly having an edge over the market, single systems or techniques are short lived and need to replaced to maintain an edge
4. Population studies show us other factors outside of mere win/loss rates and statistics influence profitability and drawdown and that these factors are very significant. Any trading should be taken on the side of caution.
Of course statistics are necessary to tell you whether your system will work or is worthwhile continuing with. Its incredibly important with technical trading but it equally tells us that winning 80% of the time with 2:1 win rate is not all there is to it.
My trading system is based a lot on surviving as this is what makes money as an investment.
Why have I emphasised this point? The issue is that even if you have a 75% win rate system with a 2:1 reward/risk ratio (which no one I have ever seen has achieved) it will still eventually blow up given enough time. If you trade 50% risk on that system it will blow up very quickly. If you trade 1000 times per day, it will blow up in a matter of months. No matter what system you use, no matter how great it sounds, if you do not understand that all systems have finite lifespans in the matter of trades that are rapidly shortened by trading many times per day or by increasing risk per trade, then you have missed the point. I have also made the point of looking at your own statistics and relating that to the theoretical statistics (either given by a guru or by backtesting) and questioning why there is a discrepancy. Is there something you are doing wrong, or is the fault of the system itself?
You might ask - why have I spent several posts discussing what I could have posted in one post - its because it serves to illustrate and emphasise certain points. You can quibble about small points but rather than discuss those I want to put forward my general ideas and I hope you find them useful.
This concludes the 'statistics' part as I want to move onto talking about other subjects in further posts