In my post yesterday on deciding when a strategy is good enough, you may have noticed how imprecise the language was:
Is the win rate “in the range”?
Is the profit factor “reasonable”?
Is the number of trades per day “sufficient”?
Is the equity curve “smooth enough”?
In other contexts, I might refer to these ambiguous phrases as weasel words.
Those who know me well might find this surprising – I routinely offer bets to people who use weasel words.
So why would I purposefully have such vague rules about evaluating trading strategies?
Two reasons:
First, if you have precise, black and white rules about trading strategies, you ignore the trade-offs that come from relying too much on a particular metric.
Do you want a higher profit factor? That almost always comes with a reduction in the number of trades in a strategy.
Second, it’s very easy to overlook a great strategy because it doesn’t fit one of your rigid rules.
Yesterday, I spoke to a trader who shared that he only considered strategies with a profit factor above 3.
That’s all well and good, but doing so ignores the boatload of profitable strategies with profit factors below 3.
What would a strategy just outside your range need to look like for you to trade it?
Next time, I’ll go over the most important “metric” of them all: the equity curve.
-Dave
