Paul King May 31st 2006
Some things in trading just aren't possible. Maybe a car analogy will
help. Imagine for a moment you are designing a car and it has to have the following characteristics:
So it's a fast sports car at the high end of performance. Now you have
a couple more required characteristics:
If you know anything about physics and conservation of energy you will quickly
realize that these 4 characteristics would be virtually impossible to embody into one vehicle (with current technology).
You have 2 main choices - compromise on some of the requirements, or design 3 cars (a sports car, an SUV, and a compact).
What has this got to do with trading? Well a lot of the time people are
trying to design the 'Holy Grail' system that has the following characteristics:
Just like the car design where some of the characteristics have an inverse
relationship (e.g. top speed to fuel economy) trading systems exhibit similar behavior. High win%, for example, is usually
inversely proportional to both trade frequency and average size of winners compared to losers.
When you are attempting to design a trading system it is important that you
make sure you don't have an 'impossible specification' for what you want to achieve because you don't clearly understand the
relationships between the various system components and characteristics. Otherwise the only thing you'll achieve is