Trading and the Bell Curve
When I started reading books about trading, I noticed that many authors assumed that the results of their trading would be normally distributed, and form a bell curve. However, none of them explained why. I always thought that it is a very curious assumption to make.
Why does everyone assume that results are going to be normally distributed?
I guess it is because it makes life easy. We can draw all sorts of statistical inferences once we have made this assumption. It is an example of letting our emotions dictate the method of science. I think it is a very dangerous and irresponsible approach to take.
Now I am reading The Black Swan
I think it is because of groupthink. Most traders accept what other successful (and unsuccessful) traders regard as true. When we are surrounded by people who think a certain way, we are naturally affected by that way of thinking. We tend to unconsciously develop the same ways of thinking and reacting.
How do we know if the distribution is normal? I think each trader needs to do a statistical analysis and consider this question.It may not give us the correct answer 100% of the time, but at least we are being responsible in asking one important question and searching for the answer.
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- A Great Trading Resource: Stockbee
- The Debt Curve vs. the Wealth Curve
- Which is Safer? Automated Trading or Human Trading?
- Automated Trading and Artificial Intelligence
- Your Trading is a Reflection of your Personality
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I'm George Ulmer. Matt and I started this blog and launched the Online Investing AI business. Our goal is to develop the technology to allow anyone to retire after working for 10 years.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
If winning and losing can be described with a probability traders and total profit would be the result of many small trades without being wiped out, the profit would show a bell curve for mathematical reasons. It is essentially a random walk.
Oh contraire, mon ami! Many people think that the results would be a bell curve, but I wonder if in practice that may not actually be true. I don’t think that trading results would necessarily fall into a normal distribution because they are not random.
Jacob, thanks for your comment and love your blog! Still in the process of reading each post!
I loved that book. It changed my life.
Before reading that book I was a bit skeptical about the things academia teaches us about economics and investing but now I am convinced that universities teach things which aren’t necessarily true and most of the time are unpractical. An academic education is a disadvantage in trading.