Close PL observation will reveal nothing

Discussion in 'Trading' started by ValeryN, Apr 7, 2021 at 10:37 PM.

  1. ValeryN


    In "Fooled by Randomness", Taleb portrays a happily retired dentist who expects to earn 15% annually on his investments with a 10% error rate (or volatility) per annum. This "translates into a 93% probability of making money in any given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of making money over any given second as shown" in the following table:

    Probability of making money at different scales
    Scale                      Probability
    -----                      -----------
    1 year                        93%
    1 quarter                     77%
    1 month                       67%
    1 day                         54%
    1 hour                        51.3%
    1 minute                      50.17%
    1 second                      50.02%
    (From p.57, "Fooled by Randomness" by Nassim N. Taleb)
    Taleb continues:

    "Over the very narrow time increment, the observation will reveal close to nothing. Yet the dentist's heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows in red on his screen... At the end of every day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones. These amount to 60,688 and 60,271, respectively, per year. Now realize that if the unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large deficit when examining his performance at a high frequency."

    And yet most people obsess over PL and PL based decisions. Which is basically a classic garbage-in garbage-out situation.

    PL matters at the end of the day, but not at short intervals and not without sufficient observations = trades.

    For my personal trading I hid PL info from all intraday/EOD and even weekly reports. What matters there is only if executions were done in accordance to the system.

    Whenever system is performing or not is an offline analysis outside of trading hours, and can be done only after sufficient number of observations is recorded. Quite often it means waiting months to get enough data.

    Looking closer and more often leads to more stress and anxiety. And very often to compulsive, unnecessary and eventually expensive changes to a trading system, which lead to even more stress and anxiety.

    Last edited: Apr 7, 2021 at 10:45 PM
  2. Craig66


    This is very true, I run automated systems at a fairly high Sharpe, even then, intra-day p/l can just seem like noise. I still watch what's going on in terms of p/l every day, but only to make sure that nothing new or exceptional is happening. Obsessing over short term p/l is a very real psychological hurdle that traders need to overcome, and that only comes with beatings and experience.