New article Applying the probability theory to trading gaps has been published:
In this article, we will apply the probability theory and mathematical statistics methods to creating and testing trading strategies. We will also look for optimal trading risk using the differences between the price and the random walk. It is proved that if prices behave like a zero-drift random walk (with no directional trend), then profitable trading is impossible.
Let's test the EA on the year of 2017 and
define the risk value for trading in 2018 based on its results. The
balance/equity graph based on test results of 2017 is provided below.
I have to make a few clarifications
before proceeding to the risk calculation. First, we need to justify the
need to determine the correct level of risk. Second, it is necessary to
explain the advantage of applying our theory for this purpose.
Speculative trading is always
associated with uncertainty. Any trading system sometimes makes losing
trades. For this reason, the risk should not be too large. Otherwise,
the drawdown will be excessive. On the other hand, the market may change
at any time turning a profitable system into a losing one. Therefore,
the system's "lifetime" is finite and is not known precisely. For this
reason, the risk should not be too small. Otherwise, you will not be
able to obtain all possible profit from your trading system.
Author: Aleksey Nikolayev