Consider These Two Trading Strategies...
- Thread starter Visaria
- Start date
"A theory should be made as simple as possible but no simpler." -- Albert Einstein
The simplest theory Einstein could find to explain the cosmos was General Relativity, which most scientists would agree is not simple compared to most other scientific theories.
Putting simplicity first in trading strategy development is putting the cart before the horse. If the markets were as simple as some traders claim, we'd all be rich. First find a strategy that best beats the market. Then if possible simplify it. Otherwise learn to live with the complexity. Never sacrifice accuracy for simplicity.
It's certainly simpler than it once was, although it might not appear "simple" to the novice eye. Again the system is not the hard part while it's development requires time and effort, consistent execution of trade plan rules keys success.
System Achievement Score (SAS)
SAS == 4*k*max[ 0, E ]*PF*min[ 1, N/1000 ] ,
where
k is the Kelly fraction aka the solution to the optimal geometric growth equation (see below),
E is the expectation (%/100),
PF is the profit factor (see below),
N is the number of trades in the performance evaluation.
The optimal geometric growth equation for trading is
0 = sum[ Ri/(1+ k*Ri) ]_i=1toN ,
where
Ri is the return (%/100) of the i'th trade.
PF is the ratio of the gain total to the absolute value of the loss total.
PF == sum[ max[ 0, Ri ] ]_i=1toN / sum[ max[ 0, -Ri ] ]_i=1toN
SAS(A) == SAS[ +1, +1, +1, -1, -1 ] == 4*.2*.2*(3/2) == +0.24
SAS(B) == SAS[ +2, +2, -1, -1, -1 ] == 4*.1*.2*(4/3) == +0.11
Strategy A is superior.
SAS == 4*k*max[ 0, E ]*PF*min[ 1, N/1000 ] ,
where
k is the Kelly fraction aka the solution to the optimal geometric growth equation (see below),
E is the expectation (%/100),
PF is the profit factor (see below),
N is the number of trades in the performance evaluation.
The optimal geometric growth equation for trading is
0 = sum[ Ri/(1+ k*Ri) ]_i=1toN ,
where
Ri is the return (%/100) of the i'th trade.
PF is the ratio of the gain total to the absolute value of the loss total.
PF == sum[ max[ 0, Ri ] ]_i=1toN / sum[ max[ 0, -Ri ] ]_i=1toN
SAS(A) == SAS[ +1, +1, +1, -1, -1 ] == 4*.2*.2*(3/2) == +0.24
SAS(B) == SAS[ +2, +2, -1, -1, -1 ] == 4*.1*.2*(4/3) == +0.11
Strategy A is superior.
If costs & outcome are the same, then what's the difference?
Same input as well as same output.
(Notice the singularity (Snapshot) vs Plurality)
Doesn't make two things equal.
That's two different roads.
But we won't know them,
Because we won't walk them.
They look the same,
But they are two singular beings.
I personally think the first way (A)
Can inflict you more harm than the second.
But there may be other differences,
We just have to walk them.