Finance

Why does repeating a strategy not confirm profits

Whilst average outcomes become more predictable under stability assumptions, losses are still possible, profits over finite periods arent garunteed and traders with limited capital aren’t necessarily protected.

What other information might you want before employing a strategy?

transaction costs, performance on genuinely unseen data and whether the historical signal remains reliable in different market conditions

why might market makers worry about traders who make predictive trades?

Adverse selection is when the trader knows more than the market maker, and thus can make trades knowing the market is going to move in a profitable direction for them, and an unprofitable direction for the maker

How might a market maker deal with being adversely selected?

they may adjust quotes, widen their spread, manage their inventory or reduce their exposure.

how do expected profit and compounded growth differ?

expected profit considers each trade independent from the next. compounded growth uses the result of the last trade as the starting point for the current one. thus, the sequence of losses and wins affects compound wealth, and punishes getting too close to ruin.