Plurality Equals Profits

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Today's Trader Tip Tuesday is going to be a quick one and as you can see, it's January 31 and it is below zero outside, so I got my skullcap on, I got my sweater on, and I'm ready for the cold. All right. Today plurality equals profits. Plurality equals profits is law number four of the 10 Irrefutable Laws of Trading Success. In the 10 Irrefutable Laws of Trading Success, each law represents an area that, in my research, has consistently shown statistical advantages. 

The concept of plurality is where, when a market goes up, if the correlated markets also go up, or the markets in a sector and asset class of all the markets go up, it is much more likely that your individual trade will work than if just the market itself is going up. This is a key concept because most traders, especially new traders, they just look at a signal, they just look at a system, they look at a pattern, and they hope that it'll work. What they don't realize is just adding this one filter of plurality can make a massive difference in the success of their trades.

This is a back test that one of my students ran recently. We have a simple trading system that we teach new students called a simplified BB gun and the simplified BB gun system, my student went and ran it, he wrote code, which he coded up the system, and he randomly pulled signals. This is an example of one of the samples he ran; there are 101 trades in this sample at a 44 and a half percent win rate, and average ROI 12 cents and expectancy of five cents. Now he took the same system, and he put a plurality filter on it. Now it was still random generated trades, but these trades could only be generated if they also met a plurality filter that we teach our classes. With the plurality filter, pulled 100 trades, the win rate went from 44 and a half percent to 79%. The average ROI from 12 cents to 126 and expectancy went from five cents to 99 cents. The first thing I pull was a system that really wasn't even tradable. It was profitable, but not really tradable because the profit was so thin, the margin was so thin, to a system that is excellent. 99 cent expectancy is a very, very good system just by adding a plurality filter.

If we're looking at a sector, let's say we're looking at XLE, the energy ETF, we're going to want to see the majority of those stocks going up if we're going to buy individual stock in that sector. If maybe we're looking at something like XLC, which was really weak last year, the communications ETF. If we want to go short, we want to see multiple names being weak, not just the name we get the signal in and if we have that, that shows that there's typically some type of fundamental influence. It's not just about the stock itself, but it's about the whole sector or the whole economy that's putting all the names in play and when this occurs, our signals are much stronger.

If you've never looked at this, and a lot of people don't look at it because it's hard to test, there's some simple things you can do to test it. If you go look at this, you're gonna see that this will make a substantial difference, a massive difference in your trading. Check it out. I'll see you next Tuesday when it's hopefully a little warmer and I'll be continuing to share tips with you like this one today that will help you take your performance to elite level. Have a great week. God bless.