“Highly Accurate Trading System” Doesn’t Mean a Thing

Posted on Apr 15 2016 - 12:46pm by Sharpe Trade

This is a point we attempted to make in our “Money Management” series.  But allow me to re-iterate the concept here as it’s something we see again and again and again with new traders.

We find that many new traders want to learn and use a “highly accurate system“.  “You know, like the professionals use“.  They seem to have this mistaken concept that leads to unrealistic expectations springing from the idea that to be a ‘professional trader’ means that you are always correct about where the market heading in the future.

Nothing could be further from the truth.

So let’s make a few things clear.  Not all professional traders trading books worth millions, use ‘highly accurate’ processes.

Let me repeat that …

Not all professional traders trading books worth millions, use ‘highly accurate’ processes.

Some of the best traders I’ve run across, can grind positive expectancy through time periods when they are only 30% accurate in their trades.  In fact, some of the best traders in existence have gone through time periods of their career where they were less than 30% accurate.  I would go so far as to say that the majority of professional traders … have a hit rate of less than 60%.  And they still make incredible returns.  So we are not saying that most professional traders are not quality traders.  I’m talking about some of the best traders among us. 

Now don’t get me wrong.  In and of itself, there is nothing wrong with a “highly accurate system”.

Provided this “highly accurate system” is properly and mathematically risk advantaged.  That’s what you need to keep in mind.  And most importantly, ask if such a process is either immune to, or can survive what we might call a ‘Global Risk Event’.  In other words, it really doesn’t matter how ‘accurate’ you are on a three year stretch, if a single 2008 event destroys any and all of your progress; as well as the account itself.

Accuracy is important to understand as a number.  But keep in mind the context.  The context, is a discussion and understanding of ‘risk’ of such processes …

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