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Bayesian Testing of Trading Ideas
Conviction should follow confirmation. The only confirmation I see discussed around trading on Twitter are additional untested signals. My goal is to change that, at least a little bit.
My goal is to promote scientific skepticism in the trading world. I apply Bayesian hypothesis testing to quantify the uncertainty around return distributions following so-called signals. If the signals have edge, the return distributions will show edge.
I believe that backtesting should be the last step in evaluating a strategy. Results could easily be attributable to luck. Instead, I assume there is no effect and allow the data to change my mind via a Bayesian updating of my priors.
It’s the way we naturally think, and it’s the way we test medicine. Why don’t we put our money where our mind is?
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