|
PureBytes Links
Trading Reference Links
|
>Assuming there is no mathematical dependency between wins and losses (ie. >a
win does not beget a win, or a win does not beget a loss) in a system, >the fact
that your system test just happened to find, say, five >consecutive losses is
irrelevant.
If there is no dependency, then technical analysis is just wishful thinking. If
the basis of TA is correct - that patterns do exist in the market, then past
actions do affect future outcomes. If there is no dependency, then you can not
devise a successful system for entering and exiting the market. You might,
however, develop a system that manages trades by limiting losses and letting
profits run. However, for this to be successful, such a system DEPENDS on large
runups to cancel the limited rundowns. If the markets were truly random,
resulting in a 50/50 outcome, every trading system would eventually fail. The
only way to win would be to quit at the right time.
No gambling casino, insurance company, or trader can survive without a
statistical edge. They also require enough capital to keep from going bust.
Whether that happens with one trade or thirty is irrelevant; knowing the total
capital requirement is the key to success. Since we can't accurately predict
every event, we must accept the fact that our analysis is totally dependent on
statistical theories. We can take heart from the knowledge that there are
consistently successful traders who employ a variety of systems.
To use the largest losing trade instead of the largest drawdown would put you at
risk of ruin with one large loss followed by one other loss. Of course, using
the smaller of the two assumes the other won't happen. I think adding the two
to determine the minimum capital requirement would be more realistic, and many
traders suggest multiplying the drawdown by two, three, or more just to cover
life's vagaries. In any event, having enough capital to survive whatever can
happen is the key to allowing a successful system to work. Gamble with that
fact of life and you've thrown away any statistical edge.
Gary Randall -- Brunswick, Maine
|