Profitable ETF Trading Strategies: understanding what contributes to your trading results
Sometimes I think we try to give ourselves too much credit and too much blame for our trading results. There is no doubt that we are responsible for our results in the macro sense, and that it is a healthy philosophical and psychological mind-state to be responsible for results.
It is clear to me though, that the positive edge for many robust systems is small but persistent, and relies on having a large number of opportunities to have a realistic confidence in realizing the expected, average return. The fewer the opportunities, the more the variance of individual trade results influences final results.
This is why casinos want to have a million people wagering $1 rather than 1 person wagering $1 million. They can’t predict the outcome of a single event, but the larger the number of chances, then the more likely the expected return will come through.
If the market is really a complex adaptive system and if our judgment is only a small part of the contributing factors that actually causes results, then we are likely to overestimate how much are decision-making contributes to performance.
This is only true concerning systems which have been designed and tested, prototypes and rehearsed and in which the appropriate role for human discretion has been designed. In this kind of system, which is quite different than seat-of-the-pants trading, you might find a win rate of 55%. In that kind of the system, if you experienced five losing trades in a row, you might begin to question your own performance and decide you are in a losing streak, when in fact all you have seen is a string of losing trades that should be expected as part of a large number of opportunities.
The right decision is to check your rule set, and the details of your execution and if you are within parameters, simply continue to take the entry signals as they occur rather than trying to reinvent yourself after a normal string of losses.
By the same token, you might be tempted to think you were on a hot streak after five wins in a row and be tempted to change your rules or accept more risk. This would not be justified by the results, because five wins in a row would not be unusual for a 55% accurate.
By understanding your trading system, and the types of results you can expect given a large number of opportunities, you are in a better position to interpret results and create meaning from data.