Yesterday, I described how using nice, round numbers accomplishes nothing. Today, I’ll discuss a related concept called magic numbers.
One of the products I offer is a Trading Strategy Assessment, in which I analyze a trader’s strategy and suggest ways to improve it.
After doing several of these, I started noticing a pattern. It’s so common that now it’s one of the first things I look for when I do a strategy assessment, because the instant I see it, I know there’s very likely a simple way to improve the strategy significantly.
Here’s an example from this past week to illustrate.
A trader came to me with a day trading strategy that was working ok, but he thought it could be better. (He was right.)
When I looked at his rules, the first thing I noticed was that he was using arbitrary thresholds for the minimum price and maximum price (say, between X and Y) for the strategy.
X and Y, in this case, are “magic numbers” – they came out of thin air with no real data behind why these values were chosen.
When you choose values like this for your rules based on your gut or some arbitrary process, there are trades you’re missing.
And when you use magic numbers for filters based on price specifically, you’re likely filtering out a LOT of profitable trades from your strategy.
And that was definitely the case here.
When we looked at a wider threshold for X and Y and normalized the values he was using in some of the other rules, we increased the number of trades in his strategy by 5x, without sacrificing average profit per trade.
Look at the rules in your strategy. Are there magic numbers there that are hiding profitable trades from you?
-Dave
P.S. Could your strategy be better? (The answer is almost certainly yes.) If you’re interested in doing the same with your strategy as this trader did, hit reply and let me know.
