August 11, 2014

Not knowing what will happen next

Several times, we encounter a situation where a trade gives nominal profits or a loss. We then develop a tendency to ignore the next signal as the previous one had failed.

This is also somewhat similar to Gambler's fallacy.
For eg., consider INDIACEM. Buy signal in NOV 2013 was a breakeven trade and the short trade thereafter was also a breakeven.

This is the chart...

Then in mid-FEB you get a buy signal.... what should you do? Just go long... as a systems trader, you have no choice.

And this is what happens. A fantastic trade if taken gives superb profits. Almost 100% return!

Summary: take every signal or trade as it happens... the probability of it failing or succeeding is exactly 50%!!!

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