The importance of statistics

Simplicity comes to mind when a statistical approach is applied to the markets. Trading is not rocket science.

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All that is required is a price event that is often repetitive. Or an indicator that gives a provable signal that can be tracked.

Many technical analysis books offer descriptions of candle and bar shapes that indicate higher probability entry and exit points.

However, there are no statistics to prove whether the price movements did as were anticipated.

Finding proof

Traders who wish to succeed must put in the effort to build a rule-based system.

With a simple spreadsheet or even an exercise book, the statistical outcome can be worked through to see if this idea really works in the chosen market in the chosen time frame.

The more data the better. An idea can be canvassed using 200 bars of information, but use 1000 bars to prove the strength of the idea.

These types of statistics will show the win-loss ratio, so are important in building an internal belief system around your rules.

Then the outcome can be used as a business plan that will need only minor modifications and improvements.

Use stop losses

The use of stop losses can be added to refine your rule-based trading strategy.

Knowing that not every trade is a winner can help the trader take diligent decisions with stops on trades that do not work and be confident the next trade is coming. Only by protecting the account can the next trade be taken with no expectation of an outcome.

It’s important to believe that by staying with the trading plan, the winning trades will cover the inevitable losses that occur in any market.

By doing so, the trader will have a benchmark to work with going forward when money is placed at risk.

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