{"id":228596,"date":"2025-08-08T11:15:28","date_gmt":"2025-08-08T15:15:28","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=228596"},"modified":"2025-08-08T11:23:34","modified_gmt":"2025-08-08T15:23:34","slug":"when-your-strategy-works-is-it-just-dumb-luck-how-to-stack-the-odds-in-your-favour","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/when-your-strategy-works-is-it-just-dumb-luck-how-to-stack-the-odds-in-your-favour\/","title":{"rendered":"When Your Strategy Works, Is It Just Dumb Luck? How to Stack the Odds in Your Favour"},"content":{"rendered":"\n

The article “When Your Strategy Works, Is It Just Dumb Luck? How to Stack the Odds in Your Favour” first appeared on Robot Wealth<\/a> blog.<\/em><\/p>\n\n\n\n

Recently, we had an excellent question on the Trade Like a Quant<\/a> Discord server:<\/p>\n\n\n\n

\u201cHow do you know if your strategy is working out of coincidence rather than actual edge? The strategy might work over a long period just because of blind luck.\u201d<\/p>\n\n\n\n

Damn good question.<\/p>\n\n\n\n

It hits right in the insecurity because the honest answer is: you can never know for sure<\/strong><\/em>.<\/em><\/p>\n\n\n\n

I remember when I first started trading.<\/p>\n\n\n\n

I had this trend system that worked beautifully in backtests. It even made money for a short while in live trading. I was convinced I\u2019d found the holy grail.<\/p>\n\n\n\n

A few months later, it had all gone horribly wrong, and I was left questioning my life choices.<\/p>\n\n\n\n

(It\u2019s actually a good story\u2026 You can read about it in my case study<\/a> if you haven\u2019t already).<\/p>\n\n\n\n

Was my backtest capturing a real edge, or was I just lucky in that particular sample? I had no freaking idea.<\/p>\n\n\n\n

Since then, I\u2019ve developed a more nuanced approach to this problem. You can\u2019t eliminate uncertainty, but you can stack the deck in your favour.<\/p>\n\n\n\n

Here\u2019s how:<\/p>\n\n\n\n

Have a strong and credible basis for the effect<\/h2>\n\n\n\n

This is by far the most important thing. The first thing you should do is ask yourself: \u201cWhy should this work?\u201d<\/em><\/p>\n\n\n\n

If there\u2019s a credible reason for the trade to exist \u2013 a risk premium, a structural inefficiency, a behavioural quirk \u2013 then that provides solid evidence.<\/p>\n\n\n\n

For example, the volatility risk premium exists because people naturally want to buy insurance against market crashes. They\u2019ll pay above expected value for that insurance, which creates an opportunity for those willing to sell it.<\/p>\n\n\n\n

That makes sense. There\u2019s a natural imbalance of supply and demand that creates an edge.<\/p>\n\n\n\n

Compare that to: \u201cWhen the 13-day MA crosses the 21-day MA and the RSI is above 70, buy.\u201d<\/p>\n\n\n\n

Why would that work?<\/p>\n\n\n\n

If you can\u2019t explain it, be suspicious.<\/p>\n\n\n\n

The data should support your hypothesis<\/h2>\n\n\n\n

Once you have a credible hypothesis, check if the data backs it up.<\/p>\n\n\n\n

Use simple analysis techniques to look as directly at the effect as possible:<\/p>\n\n\n\n