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Coin Flip - bias of an edge
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Coin Flip - bias of an edge

  #31 (permalink)
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Just to qualify a little bit we weren't using a mean reversion strategy with outright futures; we were spreading. At the time the spreads had a tendency to revert more often than trend. Like you said though, by 2008 even the spreads weren't reverting anymore. That's the main reason I stopped doing it. It stopped working.

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  #32 (permalink)
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baruchs View Post
In our example we know (doesn't matter how) that the strategy has win rate of 80%.
So please compare apples to apples.

How do you know that? If we could fix the win rate life would be so simple. Final win rate is only calculated when you finally retire. The statistical bound tells you that if your strategy is actually a 50/50 coin toss you need a very large number of trades to confirm that within a small error. Since you cannot know in advance the win rate a large number of trades is required anyway. If you knew your win rate is 100% you need about 36 trades to establish that within an error of 1%.

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  #33 (permalink)
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solotrader View Post
How do you know that? If we could fix the win rate life would be so simple. Final win rate is only calculated when you finally retire. The statistical bound tells you that if your strategy is actually a 50/50 coin toss you need a very large number of trades to confirm that within a small error. Since you cannot know in advance the win rate a large number of trades is required anyway. If you knew your win rate is 100% you need about 36 trades to establish that within an error of 1%.

I don't understand what you're trying to say.
The question was if in last 100 or 1000 trades you had a 80% win rate, what is your assumption about the win rate of a next trade?

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  #34 (permalink)
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solotrader View Post
Win rate is defined for a number of trades. There is no such a thing as a win rate for one trade. There is a probability of next trade. If your win rate is stationary and an unbiased estimator of actual win rate, meaning that the distribution does not change, then the probability of the next trade is 80% but that does not mean anything as you can have 10 losers in a row with (0.2)^10 probability, in theory. This guy has another good article here.

So unfortunately you agree with me.
I would be very pleased to learn "new probability study" in which disregarding your previous probability, your future probability is 50/50.
Even more so, I have a strategy with 15% win rate. Its barely profitable due to a low RR. If you can magically make it 50% win rate for the future trades, it can be very very profitable.

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