Betting On The Paradox: Automated Trading Strategy 106
solvency > infinity
Important: There is no guarantee that ATS strategies will have the same performance in the future. I use backtests and forward tests to compare historical strategy performance. Backtests are based on historical data, not real-time data so the results shared are hypothetical, not real. Forward tests are based on live data, however, they use a simulated account. Any success I have with live trading is atypical. Trading futures is extremely risky. You should only use risk capital to fund live futures accounts and if you do trade live, be prepared to lose your entire account. There are no guarantees that any performance you see here will continue in the future. I recommend using ATS strategies in simulated trading until you/we find the holy grail of trading strategy. This is strictly for learning purposes.
“In all chaos there is a cosmos, in all disorder a secret order.”
—Carl Jung
In 1738, a mathematician named Daniel Bernoulli (not to be confused with his father Johann, his uncle Jacob, or any of the other six Bernoullis who made math history a family affair) solved a paradox that had baffled probability theory for decades. He did so with a simple coin-flip game.
The rules were simple: The pot starts at $2. If the coin lands on tails, the pot doubles to $4. If it lands tails again, it doubles to $8. It keeps doubling until you flip heads, at which point you take the money and the game ends.
The math says the expected value of this game is infinite. Since the pot can theoretically double forever, the average payout is limitless.
So, here’s the question: How much would you pay to play this game?
Math theory says you should be willing to sell your house, cars, stocks to buy a ticket to this amazing game. In reality, nobody would pay more than $20.
This is what’s known as the St. Petersburg Paradox (Bernoulli solved it while working in St. Petersburg). His paper introduced the concept of expected utility—the idea that the value of money isn’t just the dollar amount, but how much that money is worth to you (which diminishes the more you have). He realized that while winning $100 million is 100x better than winning $1 million in theory, in practice:
The first $1 million changes your life (High Utility).
The next $99 million just changes your score (Low Utility).
Conversely, losing everything has infinite negative utility. If you bet your last $10,000 on a great trade and lose, you can’t pay your mortgage—the utility cost of that loss is far greater than the numerical dollar value.
The St. Petersburg Paradox teaches us that solvency > infinity.
The utility function is personal and often inverted for retail traders. We hold losers (risking ruin) and cut winners (capping utility). This is the opposite of the St. Petersburg solution.
So what is the solution?
Our job is not to optimize math (dollars); it’s to optimize emotion (utility). We need to bet WITH the Paradox, not against it.
For the last few weeks, I’ve been obsessing over the creation of a custom system to fix this problem. In other words, I’m looking to create a strategy with an insulated floor (a limited drawdown). I think this strategy would complement the Automated Portfolio Managers (APMs) I have planned for the The Live Test in January. When I say custom, I mean a barbell system created with strategies that have already been forward-tested.
For all of you that might be new to the hunt, backtests are highly inaccurate for myrida reasons. I use them to test mechanics and gain direction more than as a true determination of performance. This is why I’m currently forward-testing (running strategies on simulated accounts using live data) over 200 strategy variations. I used these strategies to find the two best strategies for this experiment—my best shield and my best spear. I then merged these two strategies into a barbell strategy.
This is the performance of Strategy 106 when the forward test for both strategies was combined (Jan 2025 – Nov 2025):
Net Profit: $199,020
Profit Factor: 2.29
Max Drawdown: -$26,105 (Recovered quickly by the income leg)
Correlation Between Both Strategies: 0.01 (Mathematically Independent)
I’m handing over the keys to 106 today. You can download the strategy code at the end of this post. I’ve also attached the custom optimization metric I used to refine it—a non-native tool that I believe is essential because it filters out the ‘lucky’ trades that win rate often hides.
What Is A Barbell Strategy?
A barbell strategy is a method of portfolio allocation where you invest in two extremes: high-risk, high-reward assets on one end and safe, low-risk assets on the other, while avoiding the middle ground. It balances safety with the potential for significant gains. Think of a physical barbell with weights on both ends and nothing in the middle. One end is your shield; the other your spear.
Shield Strategy: High win-rate, small gains, tight stops (income/survival).
Spear Strategy: Low win-rate, uncapped potential wins, loose/no stops (wealth creation).
This is a structured cash flow approach which aims to limit downside risk, while giving us the ability to participate in unlimited upside. It’s a bit like the trading equivalent of an equity-linked CD.
If you’ve been following along, I’m sure this sounds a lot like the The Dog & The Cat series, which is also a barbell strategy, but Strategy 106 is built on utility. In other words, I held shield tryouts. I took my best performing strategies through a four step gauntlet and only one emerged as the perfect companion to my spear.
Strategy 106 works because it’s the sole survivor of a massive vetting process. I didn’t just pick a strategy; I mined it from a pool of over 200 forward-tested candidates. The more strategies you throw into the arena, the stronger the champion that walks out.