On probabilities and overtrading myth...

[trade2wiq]

Hiya!

I've been discussing with a few traders on this issue but I still can't find a reasonable solution.

1. Set daily max losses and winnings (1:1 ratio)
2. Set daily max losses and winnings (2:1 ratio) -> Allow 2 losses to reach 1 win per day
3. Set daily max losses and winnings (3:1 ratio) -> Allow 3 losses to reach 1 win per day
4. Unlimited trades from 8.30am to 10.30am and 1.00pm to 2.30pm (CST) for Dow Jones.

I'm currently interested in #4.

Reason:
I want to allow the probability of 70% accuracy to take place. For any trade, we have 50/50 chance of winning. Combine with a sound methodology, we can increase the odds to our side to 70% or higher.

Take casino operation for example (not from a gambling point of view), they know that they can keep gamblers on the table, the more they are going to giveaway all their money. That's because in any casino games, the odds are on their side. Eg. In single zero roulette, the house edge is 2.7%. Meaning for every $100, they expect to make $2.70. Mathematically the casinos are winning in the long run for sure EVEN WITH a mere 2.7% edge (assuming no mistakes by the croupiers or any cheating involved).

Since casinos (which has math wizards on their side) make full use of the concept of probability to make their living, why can't we do the same?

The more we trade (with a sound methodology that's better than 50/50), the more we are going to AVERAGE OUT the losses to get an overall profit in the end. Assuming we have a decent account balance, why should we limit our daily number of trades if we are cracking the probabilities?

I'm aware of the danger of OVERTRADING thus becoming emotional and NOT executing our methodology as we should. That happens when we are concern on the result of each trade. Nowadays, the mindset I have is "It doesn't matter whether it's a winning or losing trade this time, I know I'm going to be in profit at the end of the month with a 70% accuracy."

That way, my focus is on executing each trade the way I should and let the beauty of MATHEMATICS to decide on my account balance at the end of the month.

You see, even if you are trading just 1 or 2 trades per day, you can't run away from the truth. If your trading methodology sucks, it doesn't matter how many trades you make because you are going to lose money over a period of time anyway...

I must admit I'm not a math genius or anything like that. I don't believe in luck either. Luck is for gamblers, I'm a trader. In fact, I'm NOT even a trader, I'm just a student of applied mathematics.

Just my 2 cent and I'm open to know what professional trades like you guys have in mind...

Happy trading guys!
Jim

 

[MikeYass]

Go for it if you can find away to get a big enough edge consistently. Remember by making lots of trades you will be racking up commissions. Great if you have an x percent edge, where x needs to be large enough to cover costs and generate a good return.

 

[Hotch]

I think you're on a different wave length to those who talk a lot about over trading.

Mainly It's more about things like buying stock and then selling it when a little weakness shows, and then rebuying as the main trend it up. It is sometimes more profitable, but even the there are more efficient uses of the time (lots more situations like this).

I don't think anyone has a problem with taking lots of trades if they are all good ones.

 

[RedGreenBen]

I'm not 100% sure that I understand the question BUT I think what you are aiming to do is decrease the variability of returns by increasing the number of trades (Very close to 50% of toin-cosses will be tails if you repeat 1 billion times, not true if you repeat 8 times) so that you reliably return your assumed/proven win-rate.

But as you probably realise the win-rate is not independent of the frequency of the trades. There's a surface on a 3-D chart of win-rate v variability v frequency of trade and you need to find the point that gives you the best (by whatever criteria you chose) performance.

It's late so I might be wrong, but I might not.

Ben

 

[shadowninja]

One problem is that if you take a lot of trades on an ultra volatile day, you may take a lot of losing trades that would otherwise be profitable.

 

[Lord Flasheart]

Surely its more important what the trade is then how many. If the criteria for 2 trades a day is met take two trades. If 200 opportunities appear trade 200 times.

 

[north5]

Overtrading is only relevant for purely discretionary trading IMO. In this case it may hold.

If you have a system then you trade it - no matter how many trades it gives. If you feel that it is giving too many trades then the system is wrong. If you don't take a trade when the system says so - then you have no basis on which to evaluate your ability to make money from it as the results will be skewed by discretion.

 

[jeffsmith]

Perhaps the easiest type of overtrading to recognize happens to traders who use clearly define systematic approach. In other words mechanical trading systems. If you are using software generated signals to trade or some other form of auto trading and you start taking more and more trades outside of your system, you are probably ovetrading. This happens usually during period of time when the system is under performing. Since all systems go through weak periods, it might easily happen to everybody. Good news is, this is easy to notice and correct.