How adding more indicators does not increase profits

To answer this in a deterministic manner and not to confuse you further, I would first ask you to throw another important question – whether the indicators you have posses any real edge in market? By edge I mean winning tendency over and above 50%, so if your indicator have winning tendency of 56% then it has edge of 56-50 = 6%, notice that 50 is discarded, and does not become the part of our overall edge calculation. To be clear, I should mention that win rates are calculated using strategy back-testing over a sufficient time series data.

Why, we eliminated 50 part of winrate is because all kinds of financial market provides you a default edge of 50%, without doing anything on your part, basically it just means that, in an efficient markets at any points of time the tendency to go up or go down are always the same, no matter what strategy we deploy. We know that markets are not 100% efficient but for most mathematical model based strategies this still holds a solid ground. Therefore 50% is not an edge in reality, when we combine anything of 50-50 probability it will not enhance our win rate anyway, this is what our probability theory also tells us.

Lets run through a very simple example for our understanding, lets say we have three indicators A, B and C of win rates 50% each, in a mathematical language, when an indicator A is true state we have 50% probability of winning, and same goes for B and C. Now we are asking when A, B or A, B, C have simultaneously true states that time whats the winning edge ? is it more than 50 or less !!

As you figured out, they all have 0 (50-50) edge, therefor when system is stacked by A+B+C,additional stacking do not change existing edge any further.

To put it in simple words, only if an indicator have over and above 50% edge, then combined with another indicator could results in further improvements of overall winning probabilities, and we know that most of our indicators have 50% or less (most are in range of ~35%) win rates, they become less than 50% because of brokerage and late entries, so by now it should be clear, that such combination stacked up together cannot lead you to a more profitable trading system.

Windicator – algorithms for financial markets

Windicator is our algorithmic trading solution for capital market around the globe. Main idea is to bridge gap between computer driven and discretionary trading. Windicator can quickly implement an emotion free rule based system for a consistent profit.

End to end algorithmic trading solution

Ask a question – what infrastructure you need for automated or supervised trading business?

Data feed… ! No

Trade API… ! No

Intelligent Algorithms… ! No

The answer is You need Data feed, Trade API and Intelligent Algorithms to do that, Yes that’s right you need all three. And here we provide end to end solution so you don’t have to do a monkey business of stitching these components from different vendors.

 

How it works

Algorithm is a form of software-as-a-service (SaaS). This means little or no hardware requirements from your side, having a smartphone is more than enough!

Windicator engine that runs on the server has modules for data connection, algorithm execution, order management and interface for sending signal outputs to any external client software that connects to it using websocket protocol.

Traders can receive real-time buy/sell signals on his PC / Smartphone to act upon them. Optionally a trader can directly place exchange orders, this requires your broker has a API for data feed and order management.

Web interface shown in demo is just one form of using the service, in reality any websocket driven client can connect with API keys. NOTE that algorithms offered here are not HFT type.

View Demo

windicator signal buy/sell amibroker