Here's a question for you. If trend traders talk about following price rather than predicting it, then why do they feel that backtests are important? Well, as counter-intuitive as it might seem, a trend follower does not backtest to estimate their future profitability but rather conducts backtests to determine risk management thresholds before stepping into… Continue reading Why Backtesting is Important for Price Followers
This is perhaps the most important consideration to assess in testing the long term performance of your strategies. It is very easy these days to generate wicked equity curves that ascend in a linear way to the stars....however fall off the cliff as soon as you take them to the live trading environment. What you… Continue reading How Do I Assess whether my Strategies are Curve Fit or Not?
You can do this visually without having to understand statistics. Positive skew means that your average winners are greater than your average losers and you are trading the right hand side of the Distribution of Returns to catch the outliers (potential white swans). Have a look at the realised (blue) and unrealised (green) equity curve… Continue reading How Do I know if I have a Strategy with Positive Skew?
For Price Following Systems that operate off the philosophy of market divergence, your success is attributed to a handful of trades. The edge lies in the 'Positive Skew'. Keep to the right hand side of the market distribution by letting profits run with a trailing stop and no profit target and make sure the left hand side is managed by cutting losses short.
When we boil our trading philosophies down to bare essentials we can classify our trading styles into two broad camps.....the price followers and the price predictors. When you compare and contrast these two broad styles, you quickly realise that they are almost the antithesis of each other.