Q: This is a response to Van’s article on Poker [in last week’s Tharp’s Thoughts issue]. Poker and Blackjack odds can be calculated [everyone knows what cards are in the deck]. A card player can know for sure that they will come out ahead as long as they follow the correct rules of play. However, aren’t there too many variables with trading securities for there to be predictable odds?
Isn’t it true that traders assume an “edge” based on past performance of their systems when there is no guarantee of future results?
This is a serious question I have had for a long time. Isn’t it the reason so many traders question their systems when they are losing—because there is no way to know future odds for certain? Many thanks, Fred
A: You cannot know the future results of a system through testing and live trading, however, you can know, with some confidence, what to expect from your system given the market type. You can also adjust the expectations for your system when the market type changes.
In addition, if your sample of R-multiples is big enough, like 30-40 years, the you can pretty much know what to expect from your systems no matter what the market type. You’ll have a mean and a standard deviation and that’s enough to determine significance and long term performance.— Van
