The Importance of Gathering Stats

Welcome to another blog post, this week we will be diving into the world of stats. If this is something that you don’t like, or don’t have an interest in, then I’m afraid you are going to struggle more than is necessary in your trading career. It can be a dull task gathering 4,5 or even sometimes 10-years of data but it can make a huge impact to your overall consistency, decision making and more specifically, your profitability.

Have you ever made a decision on gut feeling? Have you felt as though it was the right decision just because it saved you money or made you money? In contrast, have you ever made a decision and then hated yourself for it because it turned out to lose you money? The simple point to note is that you should never have these feelings because you should know, without any doubt, that every decision you make is because you have the stats and the data to suggest that the decisions you make work over time. For us on the trading floor, “over time” relates to a minimum of 4-years. If something hasn’t provided consistently profitable results over 4-years of data then maybe you shouldn’t be trading it. We touched on this topic of discussion a little in the first blog post on ‘Top Tips for Consistency’.

This also brings us nicely onto the first aspect to gathering stats:

  • The necessity of the sample size

Saying something worked 100% of the time because you gathered 4 results in the last month isn’t enough data to suggest that it will continue to work in the future. Whereas if you have 150 occurrences over the last 5-years of data that provides a stat of 60%, this is something you can use in your trading.

What are stats?

We can look at stats to provide general or specific data about a given setup or patter. Some of the aspects we may want to consider are;

  • Strike rate
  • Average distance travelled
  • Average drawdown
  • Average candle size; and
  • Most frequent day of the week

An important point to note, however, is that we need to go into these with an idea of what we want to find out. If you don’t have a purpose then you won’t find any benefit from general data. For example, you should be able to say at the end of it whether the idea you had has any merit. As we mentioned previously, it should be able to help your decision making because you now know how likely something is to occur. If you don’t know the probabilities of the outcome, how are you ever meant to decide whether it was the right or wrong decision?

What role do stats play in positive results and mindset?

Let’s take an example, this is a hypothetical stat that you shouldn’t take as fact.

Example

We have gathered the data that tells us that the chances of a daily bullish engulfing travelling 1x the range is 70% and the probability of the same bias travelling 2x the range is 20%. If our target turns out to be beyond 2x the range we may look to re-consider whether this is the right target for the trade. We have another valid target and an area of structure that lines up perfectly with 1x the range so we can use our stats to suggest that this may be the better option because we know that the chances of our first target being hit at more than 2x the range are only 20%. Whereas, our new target has a 70% chance of being tapped.

Having stats also allows us to manage our expectations accordingly. If we know that the setup we are looking at has a 45% strike rate and over the last 5-years has had a few periods where we have had 4 losers in a row, then after the third loser we can still remain confident in the setup because we know that this can be fairly common and it isn’t anything to be worried about.

Bonus

Finally, I want to leave you with something that doesn’t require hours and hours of mundane stat gathering but can help provide a realistic expectation within your own trading. The biggest issue we see all the time is chopping and changing strategies because traders get too caught up in the results from the present and recent past, by which I am talking about the last 3-6 months.

Below is a table that shows the probability of the number of consecutive losers in each 100-trade sample of your trading. Therefore, even with a strike rate of 55%, you still have an 83% chance of 5 losing trades in a row.

Sam posted a great video in the workshop group a couple of weeks ago on this topic, if you would like to view this you can access this and over 20 other educational videos within our Workshop Telegram Messenger group. This is available with our Community and Analysis Pass.

Until next week, safe trading!

Jake