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Hi RT's,
Earlier this week someone (sorry I didn't save the original post) made
a comment in reguard to closing posts with comments such as "good luck". He
expressed the opinion that luck had nothing to do with trading.
I could not disagree more. Not only is luck important to traders but
it can be mesured and quantified. Take for instence the following:
Assume a trading system has an accuracy of 65% and after a period of
time, say 1 year, a user has 85% winning trades there are only two possible
conclusions 1) the accuracy is wrong or, 2) the user is one lucky S.O.B.
Now one could easly back test the system to determin if the original
65% accuracy estimate is correct. If it proves correct then we know that the
user has an annual L' (L prime) of + or - 10%. Since it is a well known
fact that luck runs in streaks and can change at any time and that, like any
similar indicator, an extream L' will average out, the trader can safely
assume that in the following year the accuracy of the system will drop to
55%. This is designated L1 (L sub 1) and is calculated as follows: 65%-L' =
L1. Giving a 2 year avg. of 65%
The opposite is true for the unlucky S.O.B. who only acheives 55%
winning trades with a 65% accurate system. However he can take hart in the
fact that in the following year his accuracy will increase to an outstanding
85%, or L2 (L sub 2) having the formula 65% + L' = L2. Again resulting in a
2 yr. avg of 65%.
Naturally one has to take time as well as value into consideration.
For example if ones 2 year L1 = 85% one can safely assume that he will
experience an L' of 60% for the next 2 years, calculated as follows: 65%
-(L' / 2).
As one can see from the previous it is quite simple to quantify the
"luck" factor in trading and make adjustments in our trading accordingly.
Something many of us do instinctively. Therefore I will continue to sign my
posts
Good luck and good trading,
Ray Raffurty
P.S. Those who can not laugh at their history are doomed to repeat it.
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