Mathematically, the outcome of a system over a long period of time is the expected value. Therefore, we are interested in trades that are as likely and as long as possible, and we want losses to be as unlikely and as small as possible.
That’s what the math says.
And that’s what the task is derived from. Solving it shows a clear direction for improving the system.
The task is to think more deeply about what makes your trades better:
1. What factors make your trades likely?
What factors will make them more likely.
Entries in strong trends in stocks. So far we have only looked at the technical side (strength of the movement, momentum) but now we are starting to look at the fundamentals and macro.
2. What factors will make the trades longer?
First of all, is there any way to focus on the longest and best ones right now? Because we need to know that removing the worse ones will have the same result as increasing the best ones.
And most, best to do both – knock out the weaker ones and focus on the best vs the best.
The same for losses.
3. What factors will make you have the fewest losses?
Maybe the losses you take have something to do with each other?
Maybe, for example, you’re adjusting SL and magnifying losses when you should be cutting them mercilessly?
This is an example of how the psyche worsens the performance of a system by creating in us a short-lived but toxic hope that the market will turn around. It does not make sense, if the trade no longer meets the assumptions, it is better for the overall result to escape from the position and not to code in your psyche that “you can wait, because the market sometimes turns.
And even if it reverses five times, but not the sixth time, you will lose 30-40% of your account.
On the loss side we have two factors:
The probability of loss should be as low as possible.
The size of the loss should be as small as possible.
Analyzing the factors that serve these two things – it’s an interesting direction to improve the performance of the system.
The best ones have another way of improving performance – pyramiding.
Pyramiding means adding to a profitable position.
In this way you can increase and expand the profitable position.
In the future, I will describe best practices in pyramiding and discuss how AI will take advantage of these opportunities.
Entry when a move is still unlikely will be small and testing. As profit is made the automat will add to the position. Many funds will skip these moves but this is one of the interesting niches that will be created.
In such an interesting niche is one of the most efficient funds – Medallion. Its system has only 51% of profitable entries (so say the representatives, I must admit I have a few different opinions on this).
This discourages others quite effectively but Medallion alone earns about 7 billion a year with an equity of 10 billion.
Therefore, I think that the niche I mentioned is interesting and for a long time will give an advantage over traders and funds that think in classic categories of discrete trading.