Winning streak? It is all in the figures!

Here we go for a technical discussion today. We have all heard that markets are more or less random, as it represents the opinions of millions of investors or traders, and of course, they don’t usually agree with each other, the proof is that there seems to be always some who wants to sell you some stuff when you want to buy it.

So prices may look random but there is a positive bias because prices can not be negative. So normal curve distribution is not applicable. See when Bollinger bands go into negative territory, you know the objective is invalid!

So let’s assume for the exercise that we have a 55% chance that tomorrow price will be higher than today, so 45% risk they are lower. What is longest series of positive consecutive days?

Any idea?

Hint:  we need to use the law of large numbers.

The formula is:

-ln(number of observations)/ln(probability)

So the longest streak of consecutive winning days for 100000 days observed is -ln(10000)/ln(.55) = 19 days and same calculation yields a 14 consecutive loosing days.

Yes, that is what swing trading is about. Anticipate these streaks of consecutive winning or loosing days and play them accordingly.

The same goes with goes with your trading strategy. The probability lays in your own skills to define a winning system. You need to backtest with as much data as possible. A system that is winning 85% of the time can still yield 6 consecutive loosing trade (but also 70 consecutive winning trades ;-))

What happens with robots trading? There are 2 points to consider:

1. Robots have been programmed by human. So they just replicate our trading strategy. So same as above applies

2. Robots can be taught to learn (machine learning, neural networks). After some time they will all more or less reach the same strategy and so they will ‘see’ same thing, so market will become flat and cancel out robot trading efficiency if any.  Some news (real or fake) will be needed to move the market. Robots will learn to cheat and will need support from humans!

So as conclusion, you need a strategy with an edge to catch swings or trends, they are predicted by the random nature of the market. You can protect your strategy by:

1. Not sharing it. Keep it secret.

2. incorporate elements that can’t be automated (e.g. action-reaction lines)

3. Incorporate strong psychological elements. Trend traders for instance do not have more than 30% success rate for their trades. Meaning they may have to endure 32 loosing trades in a row! Without excellent money management and psychological force to endure this, you blow out your portfolio and yourself in no time! But you can also catch the huge moves!

With volatility trading, I can reach 60% success rate on trades, so easier to stand psychologically, up to 85% in very volatile markets.

Until next time, trade safely

2 thoughts on “Winning streak? It is all in the figures!”

  1. I found this a very interesting analysis of calculating investment risk. I don’t have much experience in the matter, myself. In the past, I’ve only invested in the precious metals market, during 2010 -2014.

    From what I’ve learned, the metals market used to be pretty stable, until the overuse of ETFs. Any advice you can share regarding the purchasing of metals (apart from buy low, sell high that is)?

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