Leicester City started the 2015 season with terrible odds of winning the Premier League Championship. Bookmakers only game them odds of 5,000:1 of winning.
To put that in context, you are more likely to die riding a bicycle than you were to win a bet on Leicester City. または, you can think of betting on Leicester City every year. If you bet on them every single year for 5,000 年, you would expect them to win a grand total of… once.
2014 was hardly an indicator of their pending success. They were nearly relegated to a lower division (すなわち, kicked out of the Premier League). And yet, they did win the championship last year.
Leicester City’s Biggest Fan
Meet John Michklethwait. He’s the former editor-in-cheif at The Economist and he’s currently editor-in-chief for Bloomberg. 明らかに, he’s a very smart man. And yet, despite the odds and repeated disappointments, John bet on his old love, Leicester City, every single year dating back to the 1980s. That’s roughly 30 years of nonstop losing.
It wasn’t a lot of money each year: just £20. We all have our indulgences. I see the value of having skin in the game. £20 on a season is enough to make one care, but not so much that he’s upset about losing it.
Then something disruptive happened. John moved to the US last year for his position at Bloomberg. The chaos of the move threw him out of sorts, and he accidentally forgot to bet on Leicester City in 2015. He bet on them every single year dating back nearly 30 年. And yet the one year that he forgets to bet, not only did Leicester City win, but the bet paid out 5,000:1.
Let’s step back and calculate the cost of that oversight for Mr. Micklethwait.
£20 * 5,000 = £100,000.
A hundred… thousand… pounds. That kind of winning would put a nice dent in your mortgage, wouldn’t it?
The risk of low probability strategies
Everyone hears anecdotes about successful trend traders. Even winning only 30-40% 時間の, they walk away big winners over time.
What if they took that even lower? They could move their stop losses closer to the market. They’d reduce the size of the average loser, but the winning percentage might also drop to 10-20%.
数学的に, this could work out identically. 30% winners that earn 5x the average loser make for a profit factor of 1.5. A strategy with のみ 10% winners that make 15x the typical loser also have a 1.5 プロフィットファクター.
数学的に, this could work out identically. 30% winners that earn 5x the average loser make for a profit factor of 1.5. A strategy with only 10% winners that make 15x the typical loser also have a 1.5 プロフィットファクター.
They’re the same. Aren’t they?
Planet Earth isn’t the same as planet Math. 現実の世界で, people get sick and miss trades. または, they move across the Atlantic and forget to place a £20 bet.
People move. They get sick. Computers break. Things can and will go wrong with trading.
Richard Dennis once commented that the Turtle Traders would often make their annual returns off of one, single trade. A single trade!
When your performance depends on positive outliers, you’re massively vulnerable to accidents. What happens if you’re sick that day? Or your internet goes down? Or your broker locks you out of your account on the worst possible day?
Life happens, brother. A plan that depends on perfection is no plan at all. You need to make yourself robust to failure. Or even better, you’d make yourself antifragile.
I mentioned that you can do really well winning 30-40% of time. Why then, does my own trading strategy, ルール, win 68% 時間の?
Because I’m exploiting compound, exponential growth. It’s not just how much you win, but the order in which you win it.
Let’s take two examples:
- A ranging strategy with a profit factor of 1.3 that wins 68% 時間の.
- A trending strategy with a profit factor of 1.3 that wins 30% 時間の.
Each strategy risks about 1% on any given trade. と, the average of the range and trend strategies are identical in the long run.
しかし… and this is an important “しかし”, the expected worst case scenario with the trending strategy is substantially more likely compared to the range trading strategy. 効果で, the average is more average with a ranging strategy than with a trending strategy.
何故ですか? Because unusual losing streaks are devastating to trending strategies. Have you ever had a losing streak? It happens to everyone.
By using a strategy with a higher winning percentage, you’re making yourself robust to streaks of losers. と, not to mention, your average length of a winning streak is considerably higher.
Even though you’re getting the same mathematical outcome, you’re making things much easier on your trading psychology when you adopt a strategy with a higher winning percentage.
ルール & Exponential Growth
You may have thought to yourself, “68%? That’s kind of a strange number to pick.”
You’d be right. The choice of 68% winners was not a coincidence. それは, 実際, the win rate on my Dominari strategy.
Dominari is about more than just buying and selling. Trading is also about managing a portfolio and position sizing. Position sizing is phenomenally important over your trading career.
My backtest results for Dominari show that for every $2,500, the account increased to $17,855.35 後 3 年. That kind of compound growth doesn’t happen by accident. That’s why I’d like to share the good news with you in my webinar this week.
I’m going to show you how to put that exponential awesomeness to work in your trading account. Sound good? ここをクリックしてください。 to register for the FREE webinar.