This note includes the following topics:

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Law of Large Numbers(L.L.N)

• L.L.N states that the average of the results obtained from a large number of trials should be close to the expected value.
  • It will tend to be closer as more trials are performed.
• That’s how Casinos make money after people place a large number of bets over time.

Implication of L.L.N on Trading

• To determine if a trading strategy has an EDGE, you need a LARGE sample size of trades.
• Minimum number of trades to judge a potential EDGE: >40 trades
• WARNING:
  • You CANNOT judge a strategy whether it works or not based on a few trades.
  • You should NOT seek someone else’s opinion on a particular stock since you don’t know if the feedback is based on a positive expectancy system.

Statements to AVOID

All the following statements fail the Law of Large Numbers theorem (not enough sample size):

• I tried this strategy for a month and all five trades were losers. I will QUIT.
• The man who predicted a recession is now saying that…
• The Yield Curve Inversion predicted the 1929 recession.