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Comment by gojah | Hacker News Reader

20+ sigma is mostly kidding yourself about assumptions.

That said, the 2-sigma tests are for client-facing algos, where the goal isn't to build wealth for the client, it's to generate fees.

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Agreed, errors are non-normal so 20+ sigma is practically false. But it's not too far off -- I've seen strategies that never have a down day and have daily sharpes of 2.5-3.0, and those setups will generally have incredibly high sigma values even after accounting for non-normality (and other assumptions).

Remember, strategies that 'never have a down day' are only one day away from having a down day...

...and there are plenty of strategies that had only a single down day, unfortunately that one down day wiping out the entire company :)

Sure, but most strategies have such small positions that even if the market went to 0 instantly at your maximum long position, you'd still lose less than a year's worth of PNL in that strategy. The more relevant risk of blowout is something like Knight happening, statistical black swan events are not really an issue (in HFT).

I used to be very big into algorithmic and day trading, and one trader I was introduced to had Martingale'd himself into a record of something like 2 years without suffering a loss. Then he suffered a 300k loss and wiped out all of his earning plus more and then he lost a lot of his followers, at least for a while.

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