What do you do when your trading system goes wrong?

Two possibilities:

Has the world changed? Do you still have an edge? Or is this a "blip" that is within the expected error tolerance?

If you are an experienced researcher, you can employ various statistical tests, determining whether or not the actual results are plausible. Most actual traders have much less patience!

A Super Bowl Example

Regular readers know that I am a big sports fan and I also love the statistical analysis of sporting events. Looking at these examples is good for investors since it takes them away from pre-conceived market opinions and into a different universe. So let us discuss the Super Bowl.

John Dewan's Stat of the Week provides a consistently strong stream about baseball, my favorite sport. I have enjoyed the regular posts, helping to illustrate the strengths and weaknesses of both teams and players. If you share my love of baseball, you should subscribe to this weekly update.

But this is about football. John has a Super Bowl system that worked 90% of the time! Until the last seven years, where it went 2-5. He is reporting the forecast, but retiring the system – and not using it for his official pick.

The key point? He does not know exactly what went wrong, but a 90% system does not go 2-5. It was time to move on.

Implications for Investing

Today's GDP report underscores the error of those who have predicted recessions and economic collapse. The investment world is replete with broken models – forecasts that have been sadly wrong. I am going to split these sources into two broad camps, based upon the financial rewards of those providing the information. If the investor had to pick one thing to follow, that would be a good choice.

Profit from Product Sales

This group includes those who do not focus on results. They sell conspiracy theories, seminars and conferences to confirm your biases, bonds, research that is mostly for bond clients, and page views.