Traders love the illusion of precision. A few bad weeks go by, and you think, “Let’s run a t-test and see if the strategy stopped working.” It sounds rigorous. It isn’t. Imagine a strategy that, in truth, earns 10% per year with 20% volatility – roughly the S&P’s long-term profile. We’ll simulate five years of …
Let’s say you observe some effect in the market and quantify it with simple data analysis. A good question is, “What are the chances I’d see this effect solely due to chance?” And using simple Excel tools, we can answer this question without doing any formal statistics. Before we get into it, it’s worth noting …
This is the first in a two-part series. Be sure to read part 2 – Practical Statistics for Algo Traders: The Law of Large Numbers How do you feel when you see the word “statistics”? Maybe you feel that it’s something you should be really good at but aren’t. Maybe the word gives you a …
