Is it mathematical possible to turn a trading strategy with zero expected value(but a high win-rate), to a long-term profitable strategy by using certain risk/money management techniques such as: -varying position size across trades? -restarting back to smallest position size after certain of number of successful trades ? -diversification(multiple un-correlated trades), all with high win-rates e.t.c ?
yes but it is a long row to hoe. Basically you are adding additional models onto the system. Now not only do the models, themselves need to be valid and sound, they need to be integrated. That is why people run multiple models that will offset and modulate the goals and risks. They keep a "fire wall" between them to so they are manageable.
This idea came to my mind because, most options traders(especially the premium sellers) claim that adjustments techniques is an important component to options trading. I think in a fairly priced market, if one sells a strangle/iron condor and always hold till expiration(with no adjustments), then it should long term result in a zero profit or loss trade(no edge).
Not worth the hassle in my opinion. Especially because it has a high win rate. You’ve got more to lose than to earn by tweaking. Money management can maximize the return of an edge over time but it won’t turn a zero edge strategy into something profitable.
Theoretical example: Let’s say I create a strategy with a take profit to stop loss ratio of 1:3, which would result in having a win-rate of 75%. That’s a edgeless(Zero expected value) strategy, just like almost every strategy. 1. Taking this same trade in 4 different uncorrelated assets simultaneously and 2. Practicing some anti-martingale technique by reducing lot size after 2 successful trades. Could this result in a long term positive trade? I doubt but … Note: The probability of losing all 4 uncorrelated trades(with win-rates equal to 75% each) should be very low. However, there could be streaks of consecutive gains and losses in trading just like gambling.
that would be like saying, can i take the unpopular quirky girl in highschool and make her prom queen by taking off her glasses and putting her hair down.
Mathematically? Yes it is possible but not through adjusting position sizes because if the expected value is zero then changing position sizes is going to increase that since zero X any position size is still = zero. Diversification helps somewhat but all you are doing is adding different strategies to it but the fundamental strategy itself is still having zero expected value. Nothing is changed. What you want to do is to change the expected value itself. If the win rate is so high, why is the final expected value zero? There is obviously something wrong there. One should find out what's wrong there, what's causing a high win rate to result in a zero expected value at the end and go from there.
No that's like can I take the unpopular quirky girl in highschool and make her prom queen by shrinking her ten size smaller (smaller position size) or make her go with someone else who's prettier (diversification). With the adjustment in position size, she's still not going to get any dates but the impact is smaller because no one will notice her and through diversification, she might end up getting some attention but the prettier girl that she is going with might end up losing some potential dates because some people are put off by the fact that she's with a quirky girl. The quirky girl is actually very pretty and funny and smart (very high win rate)but somewhat she always ends up just being unpopular and nobody wants to be with her (zero expected value). So the most obvious thing to do here is still find out why a girl like her who has such high win rate still ends up with a zero expected value and fix that so she will end up with higher expected value.
What about using volatility swings to create a bias... Since your win rate is high, balance will tend to swing more often upside even though the expectation(upper gain=lower maxDD limits) is zero... Put your funds into 2 partitions ...cash pot and trading pot. Rebalance whenever trading pot balance increases/decreases by 15% .i.e divide just the total net profit only(or loss) by 2 and reinvest in both pots equally such that in the long run the equity curve is bias upwards... https://rsharat.substack.com/p/shannons-demon-parrandos-paradox
Anecdotally, it seems possible but it may not be so simple. Here is one example. Scientists resorted quantum mechanic to describe particle physics. There is no way to tell exactly where is the position of an electron. It can be only be determine based on probability. Out come the particle and field theory. The market price behaves like an electron. Jim Simons(American mathematician) hires physicists for his Renaissance hedge fund. https://www.reuters.com/article/simons-hedge-idUSN2135575220070522 There is even a book about this. I have not read it. Even if it's true, I cannot do it since I am not a physicist. The Man Who Solved the Market by Gregory Zuckerman