It involves choosing one of two boxes that contain different amounts of money. I originally discovered it on a Philosophy thread in the 2+2 Poker forum. It’s apparently a puzzle that’s set before first year Philosophy students, to provoke debate on the "pre-destination" versus "free will" paradox. You can also read more about it at Wikipedia: http://en.wikipedia.org/wiki/Newcomb%27s_paradox
I recently encountered what seemed like a similar quandary during forex trading. I’ve just started trading a 100% mechanical system that involves entering on a breakout of strict criteria, and using a fixed stoploss. The trade is exited at a fixed time each week, if it hasn’t already been stopped out. The actual numbers are irrelevant, at least for the sake of this exercise. This system has apparently been profitable over a number of years (and please don’t ask, because it’s not mine to share).
Anyway, this week I fell asleep at the computer, and missed the breakout. By the time I’d woken up, price had pulled back so that it was about half way between the prescribed entry point, and the stoploss, but was apparently starting to move back toward the entry point. The question that confronted me was: should I enter now, nonetheless?
Here's what the competing "voices" inside my head were saying:
-- "Mr X" told me to enter regardless, on the basis that I should have been in the trade anyway, and the subsequent price movement is going to be the same regardless. Given that the original trade was statistically on-balance profitable, my sleep was an unexpected blessing, as it now provided me the opportunity to make exactly the same trade, but enter at a more favorable price. If the trade got stopped out, my loss would be less than what it would have been, and if I ended up exiting for profit, the profit would be greater.
-- "Mr Y" told me not to enter, on the basis that I now had new information. Price had meanwhile moved unfavorably in the sense that there was now supposedly a greater likelihood of being stopped out. The calculated expectancy was based on the system being tested according to the original criteria, giving price supposed "freedom" to move either way from the prescribed breakout point, and hence I would need a re-run a back test to determine how entering on such a pullback affected expectancy.
-- "Mr Z" told me to enter only if/when price reached the breakout point once again.Just curious: what would you have done, and why?
(Incidentally, I followed the advice of "Mr X", and ended up being stopped out for –41 pips, giving me 3 losses from 3 trades thus far, using this system).