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Improving your trading strategy using probability
- Thread starter Eddy
- Start date
Here's the thing. It's now mine and other's cliche but it depends on the style of the trader.
If you are a system trader that completely follows them, you need to find the balance of profitability and risk/reward ratio in general(in general).
There's the individual factor, some can comfortably take 10 losses in a row some can't even take 3 losses in a row. Some can take a 30% drawdown without pain and some can't even take a 10% drawdown. Utility Theory is important.
There's Sharpe Ratio and Equity Curve Analysis. The you use the analyze the actual system.
If you're a discretionary trader like me who uses systems, the objective and priority of the characteristic of the system alters. I seek more for higher Risk/Reward Ratio, I pick trades out and I like to have my system pick up higher Rewards. If you're a scalper, you generally want higher profitability because the risk/reward is lower in general. (Again, in general).
That's my 2 cents.
If you are a system trader that completely follows them, you need to find the balance of profitability and risk/reward ratio in general(in general).
There's the individual factor, some can comfortably take 10 losses in a row some can't even take 3 losses in a row. Some can take a 30% drawdown without pain and some can't even take a 10% drawdown. Utility Theory is important.
There's Sharpe Ratio and Equity Curve Analysis. The you use the analyze the actual system.
If you're a discretionary trader like me who uses systems, the objective and priority of the characteristic of the system alters. I seek more for higher Risk/Reward Ratio, I pick trades out and I like to have my system pick up higher Rewards. If you're a scalper, you generally want higher profitability because the risk/reward is lower in general. (Again, in general).
That's my 2 cents.
Originally posted by Traden4Alpha
BTW, not all fractals are random. The notion of a fractal is simply a characterization of a pattern or phenomenon across a range of scales. It says NOTHING about the mechanism that generated that pattern. Some fractal generating mechanisms are highly structured and arise in highly deterministic conditions (e.g., the branching growth patterns in biological systems).
Trade carefully,
Traden4Alpha
P.S. The quote is from "The Predictors" by Bass, an excellent book for anyone thinking about trading system development, especially automated trading systems.
First of all, fractals and randomness and chaos theory are completely different things. The chaos theory does not even deal with randomness, it is about deterministic systems that are simply unpredictable because of some underlying nonlinearity, that's not the same as random. Throwing dice can produce random distributions, what does this have to do with the chaos theory? Nothing. Fractals are still different things, although they do occur in the mathematics of chaos theory but in a rather abstract way, to describe attractors (an object of study of chaos theory) that can have fractal dimensions.
Quote from TSaimoto:
There's the individual factor, some can comfortably take 10 losses in a row some can't even take 3 losses in a row. Some can take a 30% drawdown without pain and some can't even take a 10% drawdown. Utility Theory is important.
Good post, TSaimoto. Utility is such an important, little-used concept. I dream of a world where people discuss utility theory with as much familiarity as fibonacci numbers.