Hi everyone, I've been a long-time lurker on the forums but now I have a question I'd like to pose myself. If you are trading a new strategy, can you have confidence in it without trading it hundreds of times? Is it possible to know if it is worth your time before then? We look to our results to see if our strategies are viable, but it takes hundreds of individual results to account for randomness. I could have a win rate of 50% and 2:1 R/R, but still come out negative after 100 trades. Perhaps this is something we have to accept as traders, but this implies it could take a beginner several years just to know whether or not a handful of different strategies produce results. Even with the aid of backtesting, it seems there is a thin line between self-belief and delusion that traders must balance with to continue trading whatever approach they believe will be successful. I'd appreciate any responses!
If you want to succeed in trading....you have to be your own scientist, and adventurer. That's all. Completely Ignore all the books, people, social media, teachers, coaches, forums, courses, trading acadmies, etc etc misc misc out there....99.4% of it all is completely bs and nonsense and hype and noise that only sounds and looks good in hindsight theory. Designed just to enrich the salesman and companies behind it. But has no real genuine, accountable, benefit to the trader/student. And you have to pay your dues to the Gods....by devoting 10,000 hours to this craft, before you can experience truly elite world mastery.
It's that very thing that is what is stopping me from taking larger positions. I need 100% confidence my strategy works but I only have maybe 90% confidence. If that confidence level can grow closer to 100% I'll be able to take much larger positions.
%% AND that'$ the advantage Better oneTrader has of his guts being very concerned about ''several years'' Good thing for us markets are not random @ all \ i did much , much worse than random my first year\LOL\ + 2001. May not be the best timing, SH has had such a good bear run, but i told another trader, you could lean to trade SH if you wanted to. Most pants+ seat of pants included/LOL ; cost more than last close price of SH,BetterOne+ much cheaper than NYSE seat
I put a new strategy through four stages (roughly speaking, I'm simplifying a bit): 1) Historical Data 2) Hold Out Data 3) Small Size Live 4) Full Live First I test the idea or strategy on historical data. If it doesn't pass this test, then it definitely doesn't go any further; if it does pass this test, that's no guarantee of success. After that (not always after, but good enough), I chop my historical data into pieces. If I have any parameters that I optimize at all (sometimes these parameters are hidden and don't look like parameters - be careful!), I 'optimize' (this can be defined many different ways - I don't just mean maximize profit) in certain time periods and test with those same parameter values on other time periods. Some people will do this with rolling walk forward windows. I might do that sometimes, but I have other techniques that are a little more sophisticated and robust. In short, I sometimes chop the time periods in ways that reflect other covariates that I could use or factors related to other existing strategies. Ideally, I want my new strategy to play nicely with my existing portfolio, not just do well on its own. (@globalarbtrader linked to Shannons' demon earlier today, which would point at what I'm doing as a jumping off point.) In SOME cases, I actually put a strategy to the side for several months or years to let new data accumulate. It's rare that I'll do this, but occasionally I decide to do so. If it passes all of that testing, then I go live in small size, just in case there's something I'm missing. This can be especially helpful with unexpected fills, variations in bid/ask spread, finding ways to improve total commissions, etc. Some people might do this with a paper account, but I find a small size keeps me more honest and it's okay with me if I blow it up. I'm talking usually <0.1% of assets (notional), sometimes a little more. Once that's all okay, I scale up until I'm at the "bet size" (to use terminology from Kelly / Vince) I want to run that strategy at. Choosing that fraction (asset allocation) is another conversation entirely (one that is important, but seems not to be discussed often on ET.) To touch on a few questions directly: Yes, with careful testing, but I never let down my guard. Depending on your strategy, this can certainly be true. So, backtesting must have at least this many trades. I recommend starting with some basic statistics to at least be able to calculate if the average return is statistically significant or not. If you don't even have enough data for that, then you're in trouble IMO. Also, depending on the nature of your strategy, it could be vulnerable to different types of macroeconomic environments or other types of environment. I would like to have data that goes through as many of these as possible. In my long-term pseudo-investing model, I use data that goes back to the 1800s. Ray Dalio famously uses hundreds if not thousands of years of data. (Caution here to those who think the USD will be the global reserve currency forever.) Personally I wouldn't wait this long, although you could. You definitely need several years of data in your backtesting as a minimum (unless you are doing some specialized HFT thing, which you and I are most assuredly not). Indeed. Madness of crowds and delusions of traders. Psychology. I find statistics help keep me grounded in my psychology. I can trust statistics even when things are going poorly better than I can trust the intuition I had two months ago.
%% BUT IT looks like you had a big advantage to start from the get go\ you dont think markets are random. And you dont seem confused between10,000 hours. and random. Slightly off topic, but not much; a produce dealer insulted Humbled Trader when she or her Mom handled all the produce or 95% of it looking for some good ones/LOL A full figured lady @ WMT said to me ''those watermelons are NOT sold by weight'' I said like a gentleman '' i know, I'm weighing it anyway''
Unless you backtest a trading system, you have no way to know if it has a trading edge or positive expectation. Just because you have positive expectation, does not mean you will win 100%. That is why you also, need risk management, position sizing, etc. If you have negative expectation and no trading edge, it is the height of folly to keep trading just because you love the action. Go to Las Vegas. Atleast, the casinos will comp you some of your losses with free rooms and meals.
How are you coming up with these strategies? If you personally created the strategy and know the formula intimately, then you have a good chance of improving it. If it were one of those codes mechanically cranked out by a machine, then the chance of improvement is less than optimal. Bottom line is you should be the designer of your own trading strategy.
I certainly agree. I’m actually in the camp where I have an understanding of why I trade the way I do & why I expect to make money from it, but it was a terribly hard and long road to get here. If I did not have my history and experience to back myself up, only my “trading logic” and belief in that logic would exist. If I was talking to a beginner who likely has poor reasons to trade (or poor trading logic), how would they find out it is viable or not other than trialing hundreds of trades? Perhaps the answer is that there is no escape of long, difficult journey and some of us just end up luckier than others by stumbling upon profitable approaches sooner rather than later. My point is that my experience and previous results back the confidence I have in trading the way I do. For someone with neither of these, as they begin trading a certain way / focusing on a single methodology (or whatever you want to call it), is there any escape of the trial and error of potentially hundreds of trades? … I don’t believe backtesting alone is sufficient. This is very hypothetical and I’m only asking because someone asked me a question about learning how to trade. No problem if we cannot come up with an answer here. I was almost sure there was a quicker route than I took (6+ years and tremendous struggle), but now I’m not so sure.