Posted: Oct 31, 2009 13:30 Post subject: Just How Independent is a Strategy's Hit Rate?
Before I go re-inventing the wheel here, I'm hoping some seasoned users of this fabulous software can help me with a very simple question.
Here's the scenario: I have a strategy that hits at a 20% rate, and this strategy is simply a (3 x Median) exceeedance of a certain filter. Let's say (3 x Median) is 100 and on the last drawing the filter was 120, so the strategy just hit. I know of course that there's a 20% chance the strategywill again exceed 100 on the very next drawing, but I notice that whenever the filter hits 120 or higher there's a very good chance that it will reverse on the very next drawing, [u]so I conlude there a 20% chance the strategy will hit on the very next drawing, and if it does, it will hit in the range of 100 to 120[/u].
[u][i]This conclusion has powerfull implications that are only true if the hit rate of the strategy is totally and absolutely independent of what the current level of the filter is![/i][/u] For any strategy based on a (3 x Median) exceedance, the smaller the delta between the trip level of the strategy and the point at which there's a good chance the filter will reverse, the lower the number of combinations that can be generated. What if the example above were Pr? By itself it would yield only 47 combinations!
Taken to the extreme, again using the above example for Pr, if the trip level is 100 and it just hit at 105, this yields only 17 combinations, presumably with a 20% chance of the strategy hitting!
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