I’d bet that if you asked every trader if their trading was “streaky” – the vast majority would say yes. Every trader goes through dry spells and periods of nice profits. But if your trading is TRULY streaky you would be able to improve your system by modifying it slightly to skip trades or at least modify your commitment to certain trades (reduce position size).
Let’s say you have profitable and losing trades that tend to occur in streaks. If you could determine that the streakiness was statistically significant, then during a string of losing trades you could back off your position size or pass on trades until you see one that would have been profitable. Once you encounter a profitable skipped trade you could start trading again.
If the trades in your system are negatively correlated (that is, losing trades tend to be followed by winning trades and vice versa) you could potentially set up a rule to do the opposite.
I’ve recently added a streakiness report in StockTickr that will calculate this correlation statistic for you based on anything you choose to filter on (tag, date range, dozens of other filters).
It turns out that there are fewer systems that are streaky enough to profit from than you might imagine. At least in my experience, there were only a couple out of the dozen or so systems that I’ve traded that showed any promise at all for this streakiness.
I’d be interested to hear if anyone out there has implemented a rule such as this to try to improve their trading system. How did it turn out?