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Why 7% is the Difference between Failure and Success in Trading
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Why 7% is the Difference between Failure and Success in Trading

  #91 (permalink)
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Sample size mattters


RM99 View Post
It's good to see others doing the same stuff

Interestingly, I wanted to discuss your comment about in sample.

I find a lot of misconception about in sample size. Contrary to popular belief, you can actually include TOO much data. If for instance, the market has recently shifted significantly (i.e. a margin increase crushes volatility), then going further back with your in sample analysis is simply muddying the water more.

Although it's helpful to try to find an in sample period that includes multiple market structures and conditions, why go back any further than a couple of years on lower time frame strategies? On CL for example, if you had data, you could try to go back 35 years and you'd find there was a decade in there when oil didn't move hardly at all. So obviously optimization or analysis including periods like that is going to affect/sway your results, possibly in the wrong direction.

I find that it's best to find a happy medium of enough data to give you a trade size that's statistically significant (and I don't accept the college textbook n=30 value) and features a couple of recent relevant market structures, but doesn't give me so much history that it favors out of date/obsolete conditions.

I should nothing to add to your comment, as you have all said it.

If there is a shift in a market paradigm, then it does not make sense to include old data. As markets change all the time, a sample period, which is too long uses data which can no longer be exploited.

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  #92 (permalink)
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kerrmac View Post
How does your 7% theory relate to dice?x

I assume you refer to my signature.

I don't use dice for trading (though there were times when I would have done better if I did ).

The dice part refers to my addiction to backgammon.

While we're at it, it may be interesting to see what the success/failure distinction is in fields other than trading. What % separates losers, good players, and great players???

So let's take backgammon. There's an objective way to measure backgammon skill. The programs play at 'God' level or almost there, so their play / analysis is considered standard.

Here are the levels with error %s. They represent erroneous deviation from perfect play on each move.

Supernatural 0 to 5 %
World class 5 to 10 %
Expert 10 to 15 %
Advanced 15 to 20 %
Intermediate 20 to 25 %
Beginner 25 to 30 %

These are cumulative for each game. By that I mean, just because you play a perfect move, doesn't mean you play a perfect game. (Analogously, just because you make a perfect trade, doesn't mean you are a perfect trader). So an expert deviated 10 to 15% on all moves combined (effectively, maybe made 2-3 good but less than perfect plays).

As you can see, in backgammon, the differences between levels are about 5%.

From experience, I can play a game at the supernatural level occasionally, but certainly not consistently. If I average out my games, I perform somewhere between Advanced and Expert level in backgammon.

How much study and experience would it take to move into World Class?

A lot!! It's a not a linear curve.

I feel that roughly the same divisions are present in trading.

Advanced level is tough to achieve, but to go beyond that takes even more effort.

Same in other fields. You can get good at chess, but to became an Expert, Master, and Grandmaster presents progressively tougher strata of achievement, maybe exponentially so.


Some of my conclusions: 5% or 7% improvements are huge, and they are harder to achieve the higher you go.

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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  #93 (permalink)
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Fat Tails View Post
There is a systemic risk (a1) that the behaviour of the market participants has changed and the edge since evaporated, which cannot be easily estimated with statistical tools. And then there is a risk that

(a2) the sample size is too small and represents too favourable an outcome
(a3) the trading system has been curve fitted to the sample

Your approach deals with (a2), if you analyze the low point of the MonteCarlo simulation. My approach ignores that type of risk. I assume that my sample has a sufficient size and that it correctly represents the edge of the system. So I focus on the risk (b), which comes with the variance of the sample.

You are right, I was taking into consideration the (a) category of system risk. However, I did feel that I was building a plan for the (a1) type of risk. Loss of an edge will show up in W/L ratio and accuracy. So why not understand the sensitivities so that you can leverage down if the system statistics are in a period of decline.

The (a2,a3) types were also on my mind as the number of trades in the back-test was not huge. That same sensitivity understanding and leverage management applies here as well.

For the (b) type of risk, in my system...what are the odds that the system enters a trade and the next 3 days move against it 10%? That is my unquantifiable risks of ruin. Everything else should be manageable. Having only time stops puts a lot of risk in the realm of what is possible in the market.

I will still run the same type of analysis you mentioned for (b) type risk to see what kind of results I get. I will likely use back-test and real trades for the bootstrap. If this method tells me to use more leverage than I am, then I may just stay sub-optimally levered.

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  #94 (permalink)
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Anagami,

Can you provide the link to the website you used for your testing? I used to use it quite a lot, but have misplaced the link. For some reason, I thought it had gone dead a year ago or so, so never updated my bookmarks.

Adrian

Update: I think this was the link I used previously, but its still definately dead: http://hquotes.com/tradehard/simulator.html


Last edited by adrianjm; August 3rd, 2012 at 03:35 PM.
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  #95 (permalink)
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Try this one.

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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  #96 (permalink)
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Anagami View Post

Ahh yes, the waybackmachine. Awesome, thanks Anagami!



Adrian

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  #97 (permalink)
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Is it possible to use it with the broker's Web site in order to retroactively cancel a filled order that we would have preferred it never existed?

Nicolas
(joking)

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  #98 (permalink)
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I'm probably reading your post wrong, but are you saying anyone who claims 60% win rate is a liar?

For real?


Last edited by Bau250; September 24th, 2012 at 07:27 PM.
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  #99 (permalink)
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Bau250 View Post
I'm probably reading your post wrong, but are you saying anyone who claims 60% win rate is a liar? For real?


Anagami View Post
I'm not sure 60% at 1:2 RR is attainable... but you never know. Until I see somebody's trading records, I'm calling this the LIAR level (if you exist, speak up!).


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Bau250 View Post
I'm probably reading your post wrong, but are you saying anyone who claims 60% win rate is a liar?

For real?

@Bau250: He was referring to a win rate of 60% in combination with a R-Multiple of 2:1. This would mean that if your risk is R, out of ten trades you would have 6 winning trades of 2R and 4 losing trades of 1R. Your average trade would then yield (6*2R - 4R)/10 = 0.8 R for a risk of 1 R. This is indeed difficult to achieve, and if at all with a system that trades every when and now.

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