[Sticky] Lesson 1: Understanding the probabilities.
LESSON 1: This is one of the most important lessons! Do not skip this lesson even if it is boring 😉
In this first lesson we will concentrate on the 'probability'. Algo-trading has everything to do with probabilities of losing or winning, in order to be successful we need to understand this topic. For example, we need to be able to distinguish the random results (poor strategy) from the good robust results (good strategy). So what is randomness? The events whose outcome is unknown are called random. For example when we toss a coin, we do not know if it will land heads up or tails up. Another good example is throwing dice (in a game or casino), the results are always random.
Probability: an estimate of the likelihood that a random event will produce a certain outcome. Nature has given us this one great thing called mathematics, and all things in nature follow mathematical laws. This is also true for the probability, and we can use this knowledge in our trading!
A very good example that illustrates probability in action is so called 'Galton board' experiment. In this experiment balls are thrown on a (quincunx) pattern of 'pegs' and are landing in collector bins below. See the figure below.
Great content thanks so much for sharing, sure many of us benefit from this. I have manual trading that works best I got to is semi automated.
This is just the beginning...in the end we will generate validate and forward test multiple strategies and portfolios.
Very interesting example of order in chaos.