The Risk of Trading: Mastering the Most Important Element in Financial Speculation

THE DATA COLLECTION PROCESS

If you are just getting started in your trading venture, you probably do not have any data available to you and certainly no home-grown trading results. While reading about the need for what seems to be reams of endless data, you may be overwhelmed about the task that confronts you. It may appear to be a huge mountain of work, but once you set the framework for collecting the important data, the actual recording is quite easy.

The investment in time and effort to collect the correct data and record it accurately is the first step toward making better trade decision making. You do not need years’ worth of data in order to get started. Most traders will back-test six months or so and then validate it live in simulation or at a very low exposure rate for a month or two prior to actual plan execution. Going back several years to capture data may have limited value. If you recall, the theme of this book is to reduce risk by expecting similar results from past history given similar market conditions. When we go back several years to assess data, we are exposing ourselves to a market that may not have the same characteristics as today's market.

Secondly, even the law of large numbers has its beneficial limits from a value standpoint. Two questions you need to ask yourself during this process are: What information do I need to know to enable better trade decisions? How do I go about gathering this information?