In "Fooled by Randomness", Taleb portrays a happily retired dentist who expects to earn 15% annually on his investments with a 10% error rate (or volatility) per annum. This "translates into a 93% probability of making money in any given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of making money over any given second as shown" in the following table:
Taleb continues:
"Over the very narrow time increment, the observation will reveal close to nothing. Yet the dentist's heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows in red on his screen... At the end of every day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones. These amount to 60,688 and 60,271, respectively, per year. Now realize that if the unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large deficit when examining his performance at a high frequency."
And yet most people obsess over PL and PL based decisions. Which is basically a classic garbage-in garbage-out situation.
PL matters at the end of the day, but not at short intervals and not without sufficient observations = trades.
For my personal trading I hid PL info from all intraday/EOD and even weekly reports. What matters there is only if executions were done in accordance to the system.
Whenever system is performing or not is an offline analysis outside of trading hours, and can be done only after sufficient number of observations is recorded. Quite often it means waiting months to get enough data.
Looking closer and more often leads to more stress and anxiety. And very often to compulsive, unnecessary and eventually expensive changes to a trading system, which lead to even more stress and anxiety.
Val
Code:
Probability of making money at different scales
Scale Probability
----- -----------
1 year 93%
1 quarter 77%
1 month 67%
1 day 54%
1 hour 51.3%
1 minute 50.17%
1 second 50.02%
(From p.57, "Fooled by Randomness" by Nassim N. Taleb)Taleb continues:
"Over the very narrow time increment, the observation will reveal close to nothing. Yet the dentist's heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows in red on his screen... At the end of every day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones. These amount to 60,688 and 60,271, respectively, per year. Now realize that if the unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large deficit when examining his performance at a high frequency."
And yet most people obsess over PL and PL based decisions. Which is basically a classic garbage-in garbage-out situation.
PL matters at the end of the day, but not at short intervals and not without sufficient observations = trades.
For my personal trading I hid PL info from all intraday/EOD and even weekly reports. What matters there is only if executions were done in accordance to the system.
Whenever system is performing or not is an offline analysis outside of trading hours, and can be done only after sufficient number of observations is recorded. Quite often it means waiting months to get enough data.
Looking closer and more often leads to more stress and anxiety. And very often to compulsive, unnecessary and eventually expensive changes to a trading system, which lead to even more stress and anxiety.
Val
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