The Psychology of Single Stock Futures When systems and methods are tested by computer to generate hypothetical or ideal results, they are often not validated in real time before being implemented. In such an artificial situation—one that assumes perfect compliance to the trading rules that have been programmed into the computer—the results will reflect perfection. What is tested historically by computer is completely consistent, because it is implemented by a computer that follows instructions without fail. The output of such a test consists of a listing of trades and hypothetical results based on the aforementioned perfect execution of the rules that were programmed into the computer. But the computer is not a human, subject to fear, greed, lack of funds, lack of belief, and other limiting factors. The output of the system test yields a wealth of objective information, including such statistics as the percentage of profitable trades, the percentage of unprofitable trades, the percentage of trades that break even, the average winning trade in dollars, the average losing trade in dollars, the performance for given markets, and the average length of time per trade. All data derived from the computer test of a trading model are based on flawless follow-up, implementation, and execution of trading signals according to the parameters programmed into the computer. Some systems are profitable 55 to 65 percent of the time, whereas others show much higher percentages of profitability. But statistics can be misleading: I have rarely seen systems that are profitable more than 80 percent of the time. As you can imagine, a trading system that is correct 90 percent of the time, making a $100 profit on the average each time and then losing $900 on the occasion that it is wrong, would certainly not be very profitable. Furthermore, the individual trading this system would lose on one large losing trade all the profits made on nine trades! One losing trade would bring the account back to even. Should there be another error because of a lack of discipline, the account would show a net loss. Conversely, a trading system may show eight losers for every two winners. If, however, the average profitable trade is much larger than the average losing trade, even a system having nine losers out of every ten trades could be profitable if the bottom line per trade were higher on the winning side. Nevertheless, such a system would be thrown astray if lack of discipline resulted in much larger losses than expected for the eight losing trades. If lack of discipline interfered significantly with the profits on the two profitable trades, then the net results might be much worse than anticipated. stock market news ~ stock |