“You Are the Weakest Link”

Corona Del Mar, CA

Howdy Friend!

It was 20 years ago that I heard the phrase "You are the weakest link...Goodbye!"

Yet that was the first thing I thought of during a trip out to Vegas.

- The city was humming.

- The pools were crowded even with anti-social distancing (why is it called social distancing?).

- Shows were open again at 25% capacity.

- The Venetian was selling an 80oz margarita for those that like to share brain freezes with friends.

- You could practically get stoned from all the second hand MJ seeping around every nook and cranny of Sin City.

But there's one thing they didn't have that could throw a monkey wrench into the sha-bang:

A lack of transportation!

The taxi/Uber situation was by far the weakest link.

The explanation for a lack of drivers? Unemployment benefits through September.

Hey guess what? When you pay people not to work, they tend not to work.

Methinks UBI will lead to plenty more of these oversights from our technocratic overlords.

The situation got me thinking about trading: What are our weak points in trading?

Do we have blind spots?

Well, we only need to look at what newb traders are doing these days to see a blind spot like it was under a spot light.

The Gamestop traders fail to see that there's a clearing house that makes it darn near impossible to corner a market.

Wall Street solved this problem decades ago. Traders have also discovered that "free" trading platforms aren't really free whatsoever.

Slightly more experienced traders will listen to a call from a CEO who believes their stock is going to the moon...only to fall down a deep chasm of negative returns.

Their weak link was that they didn't realize CEO's are generally cheerleaders all the way down to zero.

Since you're likely a technical trader, let's fast forward a bit...The weak link for traditional technical analysis is that it's completely subjective. What defines a top when you're playing connect the dots on a chart?

100 Different Answers

Lock 100 TA's in a room and ask them to tell you where the S&P 500 is going...and when they emerge, they'll have 100 different answers.

Get that same data and plug them into a computer with exact trading rules...but when you optimize to find the best parameters, your weakest link or blind spot is that you didn't realize you have to test those same rules on data the computer never optimizes on.

It's like building an airplane but never testing until passengers are lining up at a South West terminal. Yikes!

I'd estimate that 90% of computerized trading strategies aren't using out of sample data for verification and then end up losing money in real life.

Dumb A.I

Even the most advanced stuff we're doing now with A.I has a weak link. It required us to go in and tell the A.I not to do dumb things like compare the closing price of the S&P 500 with interest rates.

Those weird comparisons will make a back test look REALLY good, but it'll quickly fail on unseen data.

At every stage of trading, you're going to have a weakest link.

The key is to understand what they are...or you'll be saying "Goodbye" to your money faster than Heaven's gate slammed shut on Jeffrey Epstein.

Trade smart,

Dan "Prince of Proof" Murphy

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Disclaimer: The results listed herein are based on hypothetical trades. Plainly speaking, these trades were not actually executed. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under (or over) compensated for the impact, if any, of certain market factors such as lack of liquidity. You may have done better or worse than the results portrayed.

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