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I would suggest that if you ran , oh say, 100,000 iterations a pattern may
not emerge but an average frequency for the occurrence would be established.
If that average frequency was say every 632 trades and you based your system
on it possibly happening every 10th trade I submit that you would be unduly
penalizing your possible profits for the sake of safety. I think that you
need to know how often you can expect a disaster to happen before you can
rationally devise a system to survive that disaster.
I also note that you assume your system adds no more potential value to your
trades then a system which looks at a stock and its price and then flips a
coin to decide whether to go short or long.
Still sleeping at night is generally a good thing.
on 4/14/00 4:34 PM, Thomas Pfluegl at thomas.pfluegl@xxxxxxxxxxxxxxxxx was
heard to mumble:
> Hi Kim,
>
>> Just curious, how many times do you have to expect to have to toss the coin
>> to get 20 consecutive heads or tails? I have a feeling that it might require
>> a very large number of trades to see that happen ( on average).
>> thanks for an interesting and informative post
> In terms of probabilities there is no way to determine when it will happen.
> When you read in the newspaper that ON AVERAGE there are 3 accidents out of
> 950.000 car trips, then it might happen to a newbie on the very first day
> he drives, or - never.
> I tested how long it takes to to get 20 consecutive heads or tails, and in
> 10.000 iterations it happend on run
> 1: 4658
> 2: never
> 3: 318
> and so on.
> But if I would run the test for one month, I am sure we will find no
> pattern. It also might happen on the first 100 iterations.
> When you are trading you should assume your max. Drawdown will ocur during
> the first few weeks.
>
> See a discussion on the "gambler's fallacy" (i.e. after a string of
> red/losses, green/profits is bound to come out) at
> http://www.iitm.com/tips/Tips-MM.htm (Van Tharps "Tips on Money Management
> & Position Sizing")
>
> Regards & have a nice weekend,
> Thomas
>
> ----------------------------------------------------------------------------
> Thomas Pfluegl, Rudersdorf 8, A - 4212 Neumarkt
> Austria Tel. ++ 43 - (0) 7941 - 8106
> http://keplerweb.oeh.uni-linz.ac.at/trading/index.html
> ----------------------------------------------------------------------------
> Austria/Europe --> high mountains --> Mozart --> no kangaroos
> ----------------------------------------------------------------------------
>
>
>
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