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 positive outliers. Have a look at the realised (blue) and unrealised (green) equity curve below produced…
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.
Nothing like a controversy to make you closely review your philosophies on randomness. In thinking more about this presentation…… you can see where the free lunch of diversification lies in the ability through ensemble averaging of return streams to allow outliers to positively influence a random series.
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.
Straight from the horses mouth. An excellent recap of systems trading by the very successful Nick Radge from the sunny shores of the Sunshine Coast in Queensland.
“Whereas “uncorrelated” random variables such as test scores splay out into the bell-shaped Gaussian distribution, interacting species, financial stocks and other “correlated” variables give rise to a more complicated statistical curve. Steeper on the left than the right, the curve has a shape that depends on N, the number of variables.”