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

29 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)?

  2. What i do not understood is in truth how you are not really much
    more well-liked than you may be now. You are very intelligent.
    You understand therefore significantly on the subject of
    this topic, produced me in my view imagine it from numerous varied angles.
    Its like men and women are not interested except it is something
    to do with Girl gaga! Your individual stuffs excellent.
    At all times take care of it up!

  3. Hmm it seems like your blog ate my first comment (it was extremely long) so I guess I’ll just sum
    it up what I wrote and say, I’m thoroughly enjoying your blog.
    I as well am an aspiring blog blogger but I’m
    still new to the whole thing. Do you have any tips for novice blog
    writers? I’d genuinely appreciate it.

  4. Attractive component of content. I simply stumbled upon your web site and in accession capital to claim that I get in fact enjoyed account your blog posts.
    Any way I will be subscribing for your augment or even I
    success you get admission to constantly quickly.

  5. You are so interesting! I do not suppose I have read through a
    single thing like that before. So great to find
    somebody with unique thoughts on this subject matter.
    Really.. thank you for starting this up. This website is something that’s needed on the web, someone with a little originality!

  6. What’s Happening i am new to this, I stumbled upon this
    I have discovered It positively helpful and it has helped me out loads.

    I’m hoping to give a contribution & aid different users like its aided me.
    Good job.

  7. Howdy just wanted to give you a quick heads up. The words in your article seem to be running off the screen in Opera.

    I’m not sure if this is a format issue or something to do with web browser compatibility but I thought I’d post to let you know.
    The style and design look great though! Hope you get the issue fixed
    soon. Thanks

  8. Excellent blog here! Also your website loads up very fast!
    What host are you using? Can I get your affiliate link to your host?
    I wish my web site loaded up as quickly as yours
    lol

  9. It’s a pity you don’t have a donate button! I’d without a doubt donate to this outstanding blog!
    I suppose for now i’ll settle for bookmarking and
    adding your RSS feed to my Google account. I look forward to fresh updates and will share this website with my Facebook group.

    Chat soon!

  10. Do you mind if I quote a couple of your articles as long as I provide
    credit and sources back to your blog? My blog is in the very same area of interest as yours
    and my users would truly benefit from some of the information you
    provide here. Please let me know if this okay with you.
    Many thanks!

  11. Hi! Someone in my Facebook group shared this site with us so I came to look it over.

    I’m definitely loving the information. I’m book-marking and will
    be tweeting this to my followers! Wonderful blog and wonderful style and design.

Leave a Reply

Your email address will not be published. Required fields are marked *