"How many live trades are required before gaining confidence?"
By Dave Mabe
Here's a question from Ami (name used with permission, lightly edited for clarity):
Ami:
I was wondering if I could ask you a question about moving from backtesting to live trading. I asked ChatGPT how many live trades are generally needed before gaining confidence, and it suggested around 50–100 small-size trades, then comparing the live results to the backtest’s expected distribution to see if they behave as though they came from the same strategy.
Do you agree with that approach, or do you look at it differently?
Dave:
Confidence in a strategy isn't a boolean.
I'm not surprised ChatGPT answered this way, because it's never had to make trades to put food on the table.
Confidence is a continuum. You can't make a few trades and then get confident enough to put your entire net worth at risk with a strategy.
Most traders scale up too quickly because they incorrectly think about confidence.
A good rule of thumb is to set a goal that your equity curve is not allowed to go negative as you scale up size.
If you scale up too quickly, then a normal losing trade can easily put you net-negative for the strategy.
This constraint puts you in a much more productive mindset.
One of the first questions I ask traders I coach is:
When was the last time you ran out of buying power with your strategy?
Rather than confidence being all or nothing, ask yourself:
What questions could I answer that would allow me to trade a little bigger?
Once you reach a certain level as a trader, this is the only question that matters.
Thanks for the question, Ami, and for sharing with the group.
-Dave
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