Bakwaas Trading


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Trading and Gambling:

It is common knowledge that many or most traders display gambling behavior.

There is a 20 point evaluation questionnaire from Gamblers Anonymous. According to them, if you answer "yes" to at least 7 of these questions, then you are a compulsive gambler and need to get help.

I just replaced "gambl" with "trad" in the questionnaire, and now it seems more relevant. Evaluate yourself.

1. Did you ever lose time from work or school due to trading?
2. Has trading ever made your home life unhappy?
3. Did trading affect your reputation?
4. Have you ever felt remorse after trading?
5. Did you ever trade to get money with which to pay debts or otherwise solve financial difficulties?
6. Did trading cause a decrease in your ambition or efficiency?
7. After losing did you feel you must return as soon as possible and win back your losses?
8. After a win did you have a strong urge to return and win more?
9. Did you often trade until all your money was gone?
10. Did you ever borrow to finance your trading?
11. Have you ever sold anything to finance trading?
12. Were you reluctant to use "trading money" for normal expenditures?
13. Did trading make you careless of the welfare of yourself or your family?
14. Did you ever trade longer than you had planned?
15. Have you ever traded to escape worry, trouble, boredom, loneliness, grief or loss?
16. Have you ever committed, or considered committing, an illegal act to finance trading?
17. Did trading cause you to have difficulty in sleeping?
18. Do arguments, disappointments or frustrations create within you an urge to trade?
19. Did you ever have an urge to celebrate any good fortune by a few hours of trading?
20. Have you ever considered self-destruction or suicide as a result of your trading?


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Quote from Xray:

Stress test: it measures how robust a trading strategy is, which is an indication of whether or not the strategy is over-fit. While any variable that affects a trading strategy's results can potentially be the subject of a stress test

The basic idea is to see what happens when small changes are made to the strategy inputs, price data, or other elements of the strategy or the trading environment. A robust strategy exhibits a proportional and relatively muted reaction to such changes, whereas a strategy that is not robust will react disproportionally and sometimes fail outright when small changes are made to its inputs or environment.

It helps to settle our mind for issue like internet failure, terminal issuesor health issues ,etc..where we miss trades.Since trending trading strike rate will not exceed 40%,never think that after performing this we get a weekly,daily,or hourly earning machine.:DD


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Kelly Criterion Simulations on simple investment scenarios:

Here is a link to a PDF by Edward Thorp in which he discusses simulation results of some simple Kelly and fractional Kelly investment strategies.

Medium Term Simulations of the Full Kelly and Fractional Kelly Investment Strategies

The results help to clarify many of the common queries about the expected returns when applying the Kelly Criterion.

Conclusions of the study:

• The wealth accumulated from the full Kelly strategy does not stochastically dominate fractional Kelly wealth. The downside is often much more favorable with a fraction less than one.

• There is a trade-off of risk and return with the fraction invested in the Kelly portfolio. In cases of large uncertainty, either from intrinsic volatility or estimation error, security is gained by reducing the Kelly investment fraction.

• The full Kelly strategy can be highly levered. While the use of borrowing can be effective in generating large returns on investment, increased leveraging beyond the full Kelly is not warranted. The returns from over-levered investment are offset by a growing probability of bankruptcy.

• The Kelly strategy is not merely a long term approach. Proper use in the short and medium run can achieve wealth goals while protecting against drawdowns.


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