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TECHNIQUE: After three profitable trades, skipping the next setup.
You don't seem to grasp the simple fact that even "a setup that has a positive expectation" goes through cyclical periods of gains and losses. The individual trades are NOT independent events, when your approach is consistent. The probability of having a winning trade is not the same after, say, a string of large winners. Why? Simply because the market does not keep on doing exactly the same thing. And if your trading method is consistent trade to trade, the probability of a winner goes down after a series of winners.
You are never in the wrong place... but sometimes you are in the right place looking at things in the wrong way.
Can you help answer these questions from other members on NexusFi?
Like many on this thread, you boil trading down to repetition and logic.
As opposed to skill (and to some degree repetition and logic).
All of the things you mention in your last paragraph can impact your performance in any endeavor. Trading is certainly not immune to life putting you off your game.
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Can you share any proof that your statement is true?
I strongly disagree with this. I have dozens of systems, each with a consistent approach to entering and exiting trades, and every analysis I have done has said the individual trades are independent events.
By saying that with trading we go through cyclical periods of gains and losses it stands to reason that we are unsure of what kind of trade outcome will happen next. From this you mean (from what i understand) it would not be wise to stop trading after having some losses because the next trade could likely be a winning one (as per your earlier post).
Alright makes sense, but yet with that same reasoning it would also be just as unwise to stop after having some winners because one still does not know for how long that winning streak may last (which is why i posed the question earlier as to what makes it okay to stop after winning trades instead of losing ones). and if you do stop, how do you know when to start taking your setups again? once you stop taking any trade that changes the statistical outcome that your system has of your "positive expectation setup". the likely reason it has a positive expectation is because those setups are executed 100% of the time all the time.
This is the issue i have with mechanical type trading. Once you change one thing, miss one trade, etc. the parameters of executing that system has changed therefore the outcome of the next trade (as if it could be somehow predicted in the first place) has also changed. If we are losing in the markets its best to probably evaluate why these trades are not working (mechanical or not). it is most likely because the "setup" being taken is not suited for the current market conditions/environment. so yes its quite wise to stop trading and not continue taking bad trades.
If you attempt to call (an unbiased) coin toss for $50 per toss -- your expectation is zero (or breakeven) over 1000 tosses. Win $25,000/Lose $25,000.
Now, if you decided to randomly bet $100 on some tosses, $1 on some tosses and $1000 on others --- your results would likely be clustered around the results from the tosses where you had the higher bets. But still, each individual toss had a 50% chance of winning (or zero expectation) -- regardless of how much you happened to be ahead or behind after the 1000 tosses. None of those tosses knew how much you had bet on them --- or were influenced by that in any way. (this, by the way, is the most common trap that many would-be gamblers fall into -- the illogical belief that they can somehow manage/bet their money in a certain way as to overcome a negative expectation)
So let's go back and examine those 1000 coin tosses and look for patterns, shall we. Hmm, looks like you lost 70% of the tosses following 3 wins in a row? So, you deduct that you have a 70% chance of losing future tosses that follow 3 consecutive wins, right? Sorry, but no -- those 4th tosses had exactly the same expectation as the 3 prior tosses (zero). The expectation was not influenced by the previous three tosses whatsoever. I'd be willing to bet that if you looked even closer, you could find a multitude of patterns that magically appeared during those 1000 tosses. Maybe it would be statistically prudent to skip every 14th, 19th and 63rd toss -- following any streak of winning 8 out of 10 tosses? And so on...........
The chance of tossing 5 consecutive heads on an unbiased coin is 3.125%. If anyone would like to toss one until they hit 4 consecutive heads -- then lay me 1-31 that they will toss a tail on their next flip ---- I'm your girl!
I think perhaps a trap we fall into early on (myself included) is that if we have a system that proves, say 50% of our trades over a backtest of hundreds or even thousands, are profitable that must mean we have a 50% chance to make money on any 1 individual trade.
This is not true. Its this belief that makes us think that our odds of having a multiple winners or losers in a row decreases after 4 or 5 of the same. Every trade is unique from the last, I don't care if we are using the same setups over and over or whatever. The price is different, the time is different, the players involved is different, the structure and context of the rest of the market is different. Even if only slightly, its definitely different. This makes it pretty much impossible to determine the odds of any 1 single trade.
I disagree. If you use the same approach (system) repeatedly, and you have thousands of historical trades over varying time, price, market structure, etc. showing that the odds of winning are 50%, then the odds of the next trade (and all future trades) are also 50%.
If you don't believe that, then the implication is that historical testing is useless, since that testing does not help you deduce the odds of future events. That is not my experience at all - when done correctly, historical testing can be extremely useful.
