This article on ‘statistical edge’ has been re-purposed as a ‘guide’ from Global Prime’s academy courses.
Finding a statistical edge in trading is quite simple, in fact, there are thousands of systems out there that do generate a statistical edge in financial markets. However, in most cases, this simplicity doesn’t translate in this ‘statistical edge’ being easy to apply overtime. Think about dieting, it’s simple knowing what not to eat, but ‘daily temptations’ makes it not easy.
What do we understand as a statistical edge?
In a nutshell, if a trader can find a repetitive approach to trade the markets via the entry style, the management of risk and keeping the psychological aspect in check, a positive return over a large number of trades is to be expected. The law of large numbers vindicates such premise.
Out of all the 3 cornerstone groups (system, risk management, psychology), assuming you are sufficiently diligent to follow the rules of your system and control your capital at risk, it then really boils down to psychology, particularly in what I believe to be the elephant in the room, which is developing ‘confidence’ around this ‘statistical edge’ your system provides.
Backtesting to the rescue
If your aim is to build confidence in a specific strategy that will act as your trigger mechanism to enter the market, you should definitely go through a rigorous process of backtesting it to determine if it has proven to be profitable over a large enough sample of trades and most importantly, through different trading conditions (trends, ranges, high/low vol, etc).
The longer the in-sample, the more robust your statistical edge can be, which leads to increased conviction upon its expectancy. By backtesting a strategy, you also avoid the common pitfall of letting the short-term results determine your level of commitment towards your strategy.
You will sooner or later face a rough patch of losing streaks, which is where it will test your conviction towards the strategy deployed. Back in the days, I made countless mistakes of letting these short-term results justify that it was time for me to seek out yet another way of trading, known as system hopping, with the elusive thinking that losing streaks could be avoided.
How to break out of this cycle?
The way I overcame this seemingly vicious cycle with no end in sight for many aspiring traders, involved the combination of finding a strategy that resonates with one’s personality, and running result simulations as far back as one possibly can with a true sense of authenticity and honesty. Failure to do so is a clear sign of non-commitment to your development as a trader.
In my case, after I completed years of obsessive testing, the next phase was to trade the strategy live with minimal capital on the line starting from as little as 0.25%, and only increase the risk/month if the results had proven profitable over this period. Note, I did that because I already had years of experience chasing my own tail in the market.
Even for newbies, it is recommendable to start on a live account to know what’s like trading the strategy with real-time data yet removing the risk of unnecessary money lost due to lack of experience, hence why the capital at risk should be comically low when starting. You should do that for as long as necessary until your results start being more consistent. Only then look to increase your capital overtime but only if the results are on your side. You must find filters to grant yourself permission to take these risk parameters to the next level.
Don’t fall for advertised EAs
Also, as a word of advice, don’t fall victim about the over-reliance of automated systems sold for a few hundred dollars. There is a reason why people would advertise these EAs. They tend to perform well in certain market conditions during backtesting only to blow up when conditions change.
Lastly, don’t try to be a hero by not using stop losses (cost of conducting business) and stay away from an over-reliance on money management (including ideas like same-pair hedges, baskets, grids, averaging down recklessly, martingale variants, etc). These strategies are all inherently very risky.
Education -The Global Prime Academy
If you are interested to follow traders that have found a statistical edge in trading. Not only that, but they are willing to teach it to you, then you should consider the brand new Global Prime Academy website. If you ready to learn a set of strategies to take your game to the very next level, you should definitely check it out.