Your statistical advantage
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    Super Moderator Gulfstream's Avatar
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    Your statistical advantage

    Today I offer you the first of the unpublished articles devoted to such an important issue as the statistical advantage. But I must warn you that the article is in cut and practical examples of the information that is my know-how are deleted from it and therefore will be available only in a commercial product.

    However, the material described in a short form summarizes the essence of the problem and I think it will be useful to all.

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    Super Moderator Gulfstream's Avatar
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    The use of money management (MM) is not a panacea of the collapse in trade. Proper money management is not able to make unprofitable system become profitable. As an exception I can bring, perhaps, only those based on the definition of the series, “z – account” type, but they work not in every case. Any book on money management contains this important message that the losing system will not be profitable with the help of MM. And the thing is, the purpose of MM is not helping the loser, in advance doomed to ruins, but the protection of a trader, who have all the chances to succeed, from his own greed and the inevitable short-term contingencies of the market, which can kill even a viable trading system.

    Loser can only delay the moment of the margin call with money management, and the successful trader is able to survive the troubles and count on a prize in the form of profit, which he really deserves. Having in mind the number of bankruptcies, we can only guess how many potentially successful traders left the market disappointed and devastated, because they have neglected the management of capital.

    However, if you've read the above-mentioned, you should immediately have questions:

    How do I know if my trading method is good?

    Does it make sense to continue working and pick up MM to my method?

    Which of my trading systems is suitable for working and which one is not?

    etc.

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    Super Moderator Gulfstream's Avatar
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    These are good questions, especially since the answers determine what we actually do in the market: play a game of chance, or build a business. I haven’t even thrown 5 rubles in the slot machine, but I do trade in Forex. Why? If you think that I consider myself capable of predicting the movement of the course, you're wrong.

    Forex does not differ from any other game of chance, especially the short-term trading, which is usual for the majority of traders, including me. The reason is the following. I can try to get a positive math expectations of my trade in FOREX, but I can’t do it with slot machines. There, I have to play a deliberately losing game established by the house.

    Though not easily but we can find in FOREX a trading system with a statistical advantage, that is, with a positive expectation, and in principle the solution to this problem is a matter of life or death of the trader in the market. Therefore, the issue in no case can be ignored.

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    Super Moderator Gulfstream's Avatar
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    Now, let's return to the casino as a good example. They earn huge money by playing with the client. But the client, being the second party of the transaction, is a gambler in this process, who in most cases a loser, and the casino is a businessman, who is guaranteed to make money on the same process. The difference between them is determined by the statistical advantage. And you're wrong, if you think it is huge. In the West, it lies in the range 1.5-4%. In Russia, of course, the conditions are much more predatory, but the fact remains.

    If you look at the situation statistically, then the casinos have a coin that shows a side, which is desired by casino, more often than the other side. By the law of large numbers casino just cannot lose.

    In the market a trading system, which has a long-term statistical advantage, is such a coin for a trader. Accordingly, there is nothing to do without a trading system in the market. Because in this case you're just playing a game of chance. More precisely, you can try your luck, and if you're lucky, the best strategy for you will be to leave the market right away to avoid bad luck. The trader who has a statistical advantage should use it, and the longer he will do it, the richer he will be. I hope now you understand that it is vitally important to determine if there is a statistical advantage in your trading method, how big and how stable it is, and to know that, you need to test your system.

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    Super Moderator Gulfstream's Avatar
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    I have been amazed for a long time that the vast majority of traders almost never wonder what kind of trading system they have, in the long term period. They prefer to not waste time on research, and they immediately get into the market, hoping for their own good fortune. What could be more stupid? Although I did the same in the beginning. On the other hand, this kind of behavior is not always a laziness. The trouble of many traders is that they have no probabilistic thinking, plus, unfortunately, there is no reliable methodology. Having checked first, second, third, the trader often does not see the problem, or see it already after the few ruined deposits.

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    Super Moderator Gulfstream's Avatar
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    My first step after I got the idea about trading strategy would be testing it. But we need to understand that we work with the data of the past and, knowing that the market can change, we cannot predict 100% of the real trade by testing. Testing does not guarantee future success, but it gives a lot of valuable statistical information about the behavior of the trading system in different market conditions. First of all, it is the yield curve, which characterizes the interaction between the market and your trading system.

    Having got this chart, you can find a statistical advantage, characterized by the tilt angle of the line that guides the development of your yield curve. The greater the angle, the better it is, because it is your average profit. You may calculate this angle with the help of the correlation analysis described in any textbook on statistics and in any spreadsheet (in the report of the terminal MT4 this index is called Expected Payoff).

    This is the theoretical scheme and in practice it is of course can be more difficult, because the trading systems sometimes "break" and we'll talk about it further, but the fact remains: without statistical advantage in the market you are a gambler.

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    Last edited by Gulfstream; 02-12-2013 at 03:07 PM.

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    Super Moderator Gulfstream's Avatar
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    If we make a classification of the systems from the point of statistical advantage, we get a picture (though not on the price chart, but on the yield chart of TS) almost like TECHNICAL ANALYSIS: the uptrend (there is a statistical advantage), the downtrend (a dealer’s statistical advantage) and, finally, the lateral trend (situation is uncertain and it is all the matter of chance).

    Though it may sound strange, but the latter is the most common situation. TS with a large negative math expectation is difficult to get as well as the one with a large positive expectation.

    Perhaps the thoughtful reader will ask: "Why, then, are there so many losers, 90%? Does it not contradict our arguments and calculations? "

    Larry Williams said something good about it once: "During my 36 years of working in the market, I've seen more of those who lost fortune than those who made it. Losers, they all acted unlike the successful traders: they made big bets, thinking that by doing this way they would earn a lot of money on one or two transactions. The winners gathered wealth by doing the right consistent steps. If you go to the market to break the bank, you will be killed rather than remain alive. Rich people do not make big bets. "

    For this reason, determining the value of the TS statistical advantage is not enough. The next , perhaps even more important step would be to find the ratio between the statistical advantage of the TS and the risk of it.

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    Super Moderator Gulfstream's Avatar
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    I can give another example of my own to illustrate this. Once I was selling a kind of commodity. It was bad in every way: a very specific, almost non-liquid (I still have the party of it unsold, even though I finished the business a long time ago), moreover, the product was semi-legal, and it was the subject of constant finding fault by regulators. There was the only one plus, which covered all the flaws. When there was a demand I provided the profits from each sale from 70 to 600 percent, depending on a situation. This enormous rate of return could compensate all: the kickbacks for supervisors, and seasonal fluctuations in demand, and rising rents for premises and other objective risks.

    Unfortunately, achieving such a rate of return is not possible in the market, but it is not that bad. Much smaller numbers would be just fine, as long as the random fluctuations of the yield curve cannot throw you out of the market before you make a profit ...


    Source:"Financial Jungle: how to survive?"

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    Registered user zintek's Avatar
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    Research shows that for new currency trading investors, successful trading is hard to accomplish. ... Take benefit of this exclusive foreign exchange market training device before choosing yours.

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    Rookie martyn's Avatar
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    I usually calculate the statistical advantage by using existing trading history in the platform, because I am not quite understand the statistics manually calculating profits. If the result is good or beneficial, means I'm using a nice MM and MM do not need to make any changes that have been able to give good results. But if the result is still a loss, then I will make changes and MM should I test first on a demo account.

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