To all of you who have dropped by, only to discover that I've not posted any new posts - well, what can I say..........blame it on the world cup that is going on now?
Pretty darn lame excuse, I know......
The truth is, I have been really, really busy exploring new trading concepts and techniques. I am now more leaning towards mechanical trading approach, where's there's absolutely no room for ambiguity.
In other words, either a setup is there, or it isn't. Simple as that, no?
But that's not what I want to talk about here.
Along the way of my research, I have also explored two very important subjects which I have ignored before in the past (and probably to the detriment of my trading account)......
......these two were actually discussed in detail by Dr Van Tharp in his book "Trade Your Way To Financial Freedom".
And no, I actually did not read the book - but the info was distilled by one of my mentor, and he had summarized all the crucial ones and handed it to me. How convenient!
Yes sir, here are the two things that I have been enlightened to. They are:
1) % Risk of Ruin
2) % Expectancy
Risk-of-ruin is simply a statistical calculation for the probability of getting into financial ruin, or getting blown trading accounts.
Expectancy refers to what you can expect to earn, on average, for every dollar you risk in a trade.
Yep, I know.......boring statistics! But I have found out that these are crucial info that I need to know, when I'm assessing viability of new trading concepts.
And it is because of these statistical studies that have made me depart from discretionary trading towards something that is more mechanical, or rule-based strategies.
Why?
Because I find it difficult to do objective back-testing when there are discretionary elements in any of the trading systems that I had attempted to evaluate.
Mechanical systems are easier in this respect, because they are:
1) 100% objective
2) Verifiable
I have just extensively back-tested a system that gave 0% r-o-r and positive expectancy. I am now "forward-testing" the system.
Monday, June 28, 2010
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