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This sentence in the following paper got me thinking:

"Some traders [...] trade every pattern whether proven or not, expecting authentic ones to produce positive results, whilst the profits and losses of fake patterns cancel each other out."
http://www.seasonalcharts.com/img/ZUTEXTEN/saisonalitaet_e.pdf

Then I got my hands on another paper - seemingly unrelated...: "The evolution of superstitious and superstition-like behaviour":
http://rspb.royalsocietypublishing.org/content/276/1654/31.full.pdf

The bottom line is that I can be rational to act irrational, or in other words there is a trade-off between being superstitious and being ignorant - and being superstitious (i.e. seeing patterns where there are none) can under certain circumstances be beneficial - this is why it survived evolution up until now.

Have you come across research that systematized this approach for the trading arena, i.e.
first: what is the right confidence level to trade a signal and
second "opportunistic trading" as an approach of its own?

With "opportunistic trading" I mean a framework to trade every signal out of some class (with money and risk management attached for not going bust) in the hope that the false signals cancel each other out and the real ones make money.

Perhaps you have some thoughts how to backtest these ideas, too.

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Passive investing for quants? I guess there could be an index fund of stat arb players. –  chrisaycock Feb 8 '11 at 16:45

2 Answers 2

up vote 3 down vote accepted

In a sense all quantitative strategies do that because no one expects every instance of a signal to create a positive return. The expectation is that on average it will. Recall that these questions are supposed to be about quantitative finance whereas the first link you have seems to be related to technical analysis.

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Not exactly definitive, but I once met a lady at a seminar I was teaching that gave an overview of how she uses astrology to make trading decisions.

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I asked her how it was working out, and if I could borrow her Aston Martin, to run some errands. For some reason she did not think this was funny, and said that her 1992 honda accord was having some trouble. I think the irony of the question escaped her, somehow. –  glyphard Feb 8 '11 at 16:48

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