Anatomy of Odds
I bet on market for 1-day-what is my return? Off the cuff – I can make or I can lose money on a bet. 50-50 chance my return is above or below Median Daily return. Go deeper there is a slim chance I have a heavy gain or heavy loss. Notice that chance of winning or losing may not be 50-50.
What happens if I bet every-day?
- What Works for you?
I catch all the upsides and all the downsides too. My total return is now the average and no longer conditional median or tails ; as I unconditionally bet-and-get all outcomes.
- What is the Risk?
Betting everyday [ is] a faith – not a method. It believes average of all bets will playout acceptable if not in next 10 days, in next 10 weeks or 10 months- without any limit on capital downside or opportunity downtimes. This may not be the case. And even if it is so- the path to terminal value may have unbearable downside leaving you a casualty along the way; not live again to average out.
How do I improve my Chances?
Make discrete bets to be conditionally risk- on and risk off markets. How? Say by using a rule. Example IFF Today’s close is > 10 day average Close then I am long else I am square. A Strategy process calculates Risk Reward performance metrics of a-strategy; and millions of competing strategies in your strategy universe.
What is achieved?
Rule based net returns are Higher and Risks are lower – relative to underlying market typically.
Caveat of any Winning rule?
No rule wins forever over in any market. Every winning rule goes through cycles of good & bad performance; and often-times hit a downturn not to return in your trading lifetime. Betting (rule based or otherwise) only when outcomes are acceptable and staying out otherwise is called Money Management.
A rule is only an ACTOR. It has NO intelligence. You need other tools to intelligently use a rule. CRITIC – does this task. USE your rules conditionally only when outcomes are acceptable and not otherwise. Our proprietary invention of a heuristic learning engine does the critic tasks for money management ( Alpha Generators) as well as capital allocation and selection decisions (Learning Engines) in risk taking. Actor-Critic engines together whip up risk-reward beyond human hand eye mind co-ordination.