Psychology Vs. Adaptation


The biggest question I have here is when do you ‘adapt’ and when do you stick with your trading strategy.

We do not know whether our strategies truly work… how do we know if we have just been ‘lucky’ verses by ‘smart’.

In the classical probability thought experiment, if a man tosses a single coin in the air it will have a 50% probability of landing on heads. When 1,000,000 men each toss a single coin in the air I will expect approximately 50% of them to land on heads. However, if we ask these 1,000,000 men to toss each of their coins 10 times in a row, I will get approximately 977 men whose coins which will have landed on heads every time.

What do you think would happen if I had performed this experiment with 1,000,000 traders pulled off the street? I reckon that some of these 1,000,000 men would start selling their ‘coin tossing’ methods in books or maybe give seminars for vast amounts of money. After all… they managed to get heads 10 times in a row didn’t they?

The point I am making is the following? “When do you truly know that your system is correct.” On one hand, if I follow Richard Dennis and his ‘Turtle System’ I should follow the rules without exception. However, if I am testing a new and unproven system how do I know whether a rule is ‘wrong’ or whether I am experiencing a statistical aberration?

Answers anyone?

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