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Beat the Model


I found this commentary interesting from the developer of the model whose daily trades I have been posting.

Beat the model!
February 11th, 2007
Earlier this week I talked about the trading in my personal accounts - I trade e-Mini SP futures, stocks, and options - and how I like to try and outperform MarketModel. The reasons are pretty simple - it is exciting to “be right” about a trade, and a day like Friday (model was LONG, stock market fell pretty nicely) are one of those days that people brag about when they went against the model.

Have you ever heard somebody brag about a great blackjack hand they had while gambling in Vegas? They will tell you in great detail about doubling down on a 12 and winning big, but don’t forget to ask them “how did you do overall?” Almost always, they are down. The same is true for betting against the model…over time, the model will beat you.

I’ve NEVER beat the model over a period of one year - I’ve tried daytrading futures and buying options. The difficulty becomes clear the first time you are wrong since futures allows you to take a completely opposite position. For example, if the model is LONG and you are SHORT, a $1000 gain in the market puts the model $2000 ahead of you since you lost $1000. So what do you do? You play catch up by doubling up on leverage, and now wrong trades cost you big time. Believe me, I’ve been there.

Maybe you have a better way to use the model signals and beat the model. If you think so, don’t start claiming victory on a few trades. Of course, you could certainly outperform it by using more leverage, but I’m talking about taking the opposite side of the trades. Keep track of your own performance and compare against the model, and let me know.