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EA development, Musings

Failure is as important as success (and possibly more so)

Keeping things trading related, many a times you will come across in a forum, or a publication, or been advocated to by another person, a technical system where a whole bunch of charts are shown how a setup is ideal for predicting the following profitable price movement. A highly compelling story of its success is painted by the evidence presented. What often is not shown are cases where the setup fails.

Lack of evidence is not evidence of lack.

Why do they do it? Possibly because they are either:

  1. Novices (they don’t know any better and likely don’t trade the setups they advocate)
  2. Malicious (they need bait for you to sign up for their trading courses and have nothing better to offer further than telling you to keep your psychology in check)

2013-02-15 Facepalm

When designing your own system, stop bullshitting yourself and go through ALL the failures and winners. It’d be tedious and time-consuming but if the gain from the winners outweigh the losses from the losers, you’ve got it.

Misc:
The scary thing is that for many fundamental traders with YEARS of experience, they still fall foul of this mental trap of focusing on when their chosen technical entry method ‘gives’ them a signal, and not when the very same signal results in a failure. Often they use the rationale that it ‘reinforces’ their fundamental call.
If the technical analysis itself has no statistical edge (or worse, a negative one), there really is no reinforcement and they are better off not bothering with it.

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