Prudent Risk Management + No Edge = Positive Expectancy??

[hilmy83]

There are simple stat tests to determine this. I would start with a bootstrap test and if promising results then try something more formal and parametric. If you want to send me the series of returns I'd be happy to run a few tests if that's not in your wheelhouse.

Can you do my stats? tell me all about it; if it's random, performance stats, etc. You're the stats guy, so i'm curious to see what a statistician thinks.

 

[ironchef]

Yeah, you don't want you margin of error to be 5% in this case.

A very dirty way to do this is take a sample of like 100 of the returns, calculate win rate. Do this 1000 or 10000 times. If the 1:1 win rate is between the first and 3rd quartile, then it's random and you got nothing. 3 lines of code. No fancy parametric stats necessary and no more time wasted on it.

Thanks for your response.

Agree. I looked up my old college statistics text book. With a win rate of < .54 a margin of error of 5% is from .49 to .59 which include the null hypothesis. I need to reduce my margin of error to 3%.

I am going to do what you suggested and calculate the win rates of the first 100, 200, 300...

Really appreciate your help.

 

[ironchef]

There are simple stat tests to determine this. I would start with a bootstrap test and if promising results then try something more formal and parametric. If you want to send me the series of returns I'd be happy to run a few tests if that's not in your wheelhouse.

Thanks for the offer.

Let me see if I can do this myself first.

I don't want to bother you unless I am stuck.

 

[SunTrader]

And don't be greedy.

I made one adjustment going from paper to live: Instead of letting my winners run (many into losses that upset me to no end), I now take profits aggressively and improved win rate from under 50% to over 50%.

There is no free lunch. Net profit went down significantly. But I am more comfortable with higher win rate than higher profits.

But the point is net profits, not comfort.

 

[tiddlywinks]

But the point is net profits, not comfort.

Goals are goals. Psyche is psyche. The two should intersect to be realistic.

 

[SunTrader]

Goals are goals. Psyche is psyche. The two should intersect to be realistic.

Some of the best trades are often the most uncomfortable.

One can't get around that if they want to succeed.

 

[ironchef]

But the point is net profits, not comfort.

Not worth it if it causes great anxiety, especially if there are other ways.

 

[ironchef]

Think about the following:

1. A game that is exactly like a coin toss, 50/50 head and tail. Head I win $1, tail I lose $1.

2. It is Markov, meaning there is no memory or history, each toss is independent only depends on the current situation.

3. Every day, I play, keep tossing until I net $1, then stop. i.e., similar to a Martingale.

4. If I reach 10 tosses and loss $1, I quit.

5. Most day I win $1.

That is the essence of my system. The only edge is risk management.

Why do I think I have no other edge? Half a dozen times I made >30 trades and I loss 67% win 33% win $ and loss $ about the same, not much more than the notional $1. If the system has any real edge, the more I traded, I should accumulate a larger win $ which I did not.

Comments are welcome.

 

[rb7]

Think about the following:

1. A game that is exactly like a coin toss, 50/50 head and tail. Head I win $1, tail I lose $1.

2. It is Markov, meaning there is no memory or history, each toss is independent only depends on the current situation.

3. Every day, I play, keep tossing until I net $1, then stop. i.e., similar to a Martingale.

4. If I reach 10 tosses and loss $1, I quit.

5. Most day I win $1.

That is the essence of my system. The only edge is risk management.

Why do I think I have no other edge? Half a dozen times I made >30 trades and I loss 67% win 33% win $ and loss $ about the same, not much more than the notional $1. If the system has any real edge, the more I traded, I should accumulate a larger win $ which I did not.

Comments are welcome.

In a coin toss situation, the $ of win and the $ of loss are equal, there is no difference.
In trading, it's not the case, cause we're buying at the offer and selling at the ask. So the spread makes the $ for losses more than the $ for wins. On top of that, the market can move quickly making the difference even bigger.
And we're not even talking about commissions and trading fees.
And all the emotions and feelings that go with trading (fear, greed, FOMO, etc.).

 

[ironchef]

I am going to remove one of the constrains, #3 and replace it with a fixed # of trades, run that for a few weeks and see the outcome. If the only edge is risk management, then the outcome will be random.

I decided to pick ~25 trades each day as contrast to ~10 each day in the current situation.