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Admit it - your profits are based on luck

  • #541
  • Jan 29, 2009 10:16pm Jan 29, 2009 10:16pm
Some excellent discussion in this thread.

If I may attempt to cut to the chase, I see two distinct schools of thought here:

School #1 is saying something along the lines of "if you were as knowledgeable and/or experienced as I am, you would have found your edge by now. Continued profitability is evidence enough that trading involves a measure of skill/expertise".

School #2 is saying "if you were as knowledgeable and/or experienced as I am, you'd have reached the point where you realize that your edge is illusory, because there's no such thing as an edge that will last indefinitely. Hence your profits thus far are the result of luck".

If a trader's track record demonstrates consistent profitability thus far, then IMO he is justified in assuming that his method/approach (whatever it might be) will continue to deliver profit. His only alternative is to quit using it altogether, which – if his goal is to be a profitable trader – is self-defeating.

I think Clockwork71 makes a valid point. IMO, the "if I can't do it, nobody can" speak tells us more about a person's ego than their level of intelligence. I don't believe that School #2 are qualified to make their point, until they have (1) examined every possible approach/method (the possibilities are infinite), and (2) demonstrated that they have an omniscient view of how markets will behave in the future.
  • #542
  • Jan 29, 2009 10:38pm Jan 29, 2009 10:38pm
Quoting hanover
Some excellent discussion in this thread.
School #2 is saying "if you were as knowledgeable and/or experienced as I am, you'd have reached the point where you realize that your edge is illusory, because there's no such thing as an edge that will last indefinitely. Hence your profits thus far are the result of luck".
This position makes no sense to me, why do we equate edges coming and going to luck? Markets change, the job of the trader is to find a new edges when the old ones become ineffective, luck has nothing to do with this from my point of view. The only way that the argument this thread tries to make stands up, is if you assume that everybody who currently trades profitably has no idea what they are doing (or why they are profiting), this may apply to some, but to apply to to everybody in some kind of blanket assertion is misguided at best.
The breaking of a wave cannot explain the whole sea.
  • #543
  • Jan 29, 2009 11:32pm Jan 29, 2009 11:32pm
if i want luck, i"ll go to vegas. if i want profit, i change as the market changes. which in turn will continue to deliver profit. sure, you won't be perfect and will falter slightly when a makret changes, but that's expected. just go with the flow...of the maret!
  • #544
  • Jan 30, 2009 2:43am Jan 30, 2009 2:43am
Quoting Craig
The only way that the argument this thread tries to make stands up, is if you assume that everybody who currently trades profitably has no idea what they are doing (or why they are profiting), this may apply to some, but to apply to to everybody in some kind of blanket assertion is misguided at best.
That is in simply words the best summary.
__Thanks__ MJ
  • #545
  • Jan 30, 2009 2:48am Jan 30, 2009 2:48am
agreed as well and on that note..happy gambl..I mean trading!
  • #546
  • Jan 30, 2009 3:16am Jan 30, 2009 3:16am
profits would be based on luck as per the random walk theory, in his book prof. Burton Malkiel explains its not possible to outperform the market in the long run, he goes on to prove his theory with 30 years of statistics. He correctly predicted the dot com bubble just before it burst. He explains the success of individuals like Soros and Buffet as outliers. If you have thousands of people tossing coins one chap well get 50 heads in a row, thats how he explains the success of the handful of individuals who have outperformed the market over time, but he goes on to say time will catch up and given enough time even these people will see their returns drop upto a point when their average treturn will fall below the market if they live long enough.

I'm not for or against this theory simply because I don't have the learning or experience and I doubt any one in here does so I wouldnt dismiss it off the bat. So what this tdon guy says may have some truth to it.
  • #547
  • Jan 30, 2009 3:27am Jan 30, 2009 3:27am
Is it probability? Yes

Is it random occurrence? Yes

Ok why do I think it’s both? Well the fact that you have a system that may have an edge exploiting price in some way is probably true (with some traders).

On the other hand, unless you have big time money and connections within. Once you hit that buy/sell button you are pretty much at the mercy of the banks and brokers and how they see fit to make a buck. Unless your system exploits those rules….LOL yea I would say that would make your system random.
It's me...
  • #548
  • Jan 30, 2009 3:28am Jan 30, 2009 3:28am
Quoting fugly
Burton Malkiel explains its not possible to outperform the market in the long run,

He correctly predicted the dot com bubble just before it burst.
Bit of a paradox. If he had any conviction in the first statement then why make any predictions, why spend any more time trading the markets when he could be a professional coin tosser? Do the rules only apply to other people? Sounds familiar.
  • #549
  • Jan 30, 2009 3:51am Jan 30, 2009 3:51am
Quoting Craig
This position makes no sense to me, why do we equate edges coming and going to luck? Markets change, the job of the trader is to find a new edges when the old ones become ineffective, luck has nothing to do with this from my point of view. The only way that the argument this thread tries to make stands up, is if you assume that everybody who currently trades profitably has no idea what they are doing (or why they are profiting), this may apply to some, but to apply to to everybody in some kind of blanket assertion is misguided at best.
Craig, your point that it's possible to profit indefinitely by continual adaptation might well be valid. But I was merely attempting to summarize what I saw as being the two opposing majority positions held in this thread. Tdion, FX-Petra et al apparently believe that, while profit is attainable in the short term, ultimately all P/L is due to luck (i.e. the thread title), for the reason that it's impossible for any edge to last indefinitely. (Of course that's assuming that I understand their views correctly.) However, I don't believe that such a position is provable, for the reasons that I gave in the final paragraph of my prior post (#542).
  • #550
  • Jan 30, 2009 4:19am Jan 30, 2009 4:19am
I agree. You are showing us a week of good trades. Now where is the week on bad trades?

Quoting cybernet69
Yes, my profits are based on luck.
  • #551
  • Jan 30, 2009 4:22am Jan 30, 2009 4:22am
Hey David.

The truth of the matter is that nobody knows everything. I can't know if edges exist or not. The only one I am aware of are triangular arbitrage opportunities.

To me, an edge is NOT A CHART PATTERN. An edge is something fundamental.

In closing, retail forex traders have so much information hidden from them, that it is nearly impossible to not be shooting in the dark.

Anyone care to dispute? If so, please explain how you are collecting your information to make your trade decisions.

Quoting hanover
Craig, your point that it's possible to profit indefinitely by continual adaptation might well be valid. But I was merely attempting to summarize what I saw as being the two opposing majority positions held in this thread. Tdion, FX-Petra et al apparently believe that, while profit is attainable in the short term, ultimately all P/L is due to luck (i.e. the thread title), for the reason that it's impossible for any edge to last indefinitely. (Of course that's assuming that I understand their views correctly.) However, I don't believe that such a...
  • #552
  • Jan 30, 2009 4:49am Jan 30, 2009 4:49am
Quoting tdion
Hey David.

The truth of the matter is that nobody knows everything. I can't know if edges exist or not. The only one I am aware of are triangular arbitrage opportunities.

To me, an edge is NOT A CHART PATTERN. An edge is something fundamental.

In closing, retail forex traders have so much information hidden from them, that it is nearly impossible to not be shooting in the dark.

Anyone care to dispute? If so, please explain how you are collecting your information to make your trade decisions.

tdion I would have a couple of questions:

What I can not grasp is this: if you are seriously believe that it is all based only on pure luck (let's exclude triangular arbitrage opportunities as that is properly also luck to find one ;-)

1. Why do you trade?

2. Are you in praxis really enter your trades 'just by luck':

* Time of entry?
(no chart or price movement at all considering - no matter if there are in any minutes any significant news ...)

* Direction of Entry?

* Unit Size of Entry? (in your possible max limit)

* Time of exit


e.g

1. trade:
Enternter a Short EUR/CAD at 15:48 Unit Size (half of your max) and exit it at 16:27
2. trade
Enter a Short EUR/USD at 17:01 Unit Size (0.001 % of max) and exit it at 17:10
3. trade
Enter a Long EUR/USD at 17:05 Unit Size (0.001 % of max) and exit it at 17:10
(note the overlapping of trade 2 and 3)

OK you might be profitable - or not ---- But do you do such in praxis???

If not I doubt you believe really it is all by luck.

I'm not saying that I figured it out all the way - but my point is that properly no one really believes in praxis it is 'only by luck'
__Thanks__ MJ
  • #553
  • Jan 30, 2009 4:50am Jan 30, 2009 4:50am
Luck what luck? Edge what Edge?
  • #554
  • Edited 7:01am Jan 30, 2009 6:36am | Edited 7:01am
People always say that only 5% of traders are profitable. If that is true then The Random Walk Theory and the Efficient Market Theory are both false. If they were true, there would be far fewer than 5% of traders who are consistently profitable.

Furthurmore, if the Random Walk Theory were true, calling someone like Warren Buffet an "outlier" would be a drastic understatement. The probability that someone would be able to consistently be profitable for over 50 years is incredibly low. The probability that there are multiple people who have been consistently profitable for many years and who are alive at the same time would be downright unbelievable.

Consider another example: The famous "Turtle Traders." If you are not familiar with the story, Richard Dennis had a dispute with one his trading friends, William Eckhardt. Dennis thought that successful trading skills could be learned. Eckhardt thought that you could not train a person to be a successful trader, you just have to be born with it. Dennis trained a group of several traders. It was a success. They became very profitable traders. If trading success were truly random, how could you explain this? Were all of the trainees just lucky enough to "flip a coin" and consistently come up with heads more often than tails?

Quoting fugly
profits would be based on luck as per the random walk theory, in his book prof. Burton Malkiel explains its not possible to outperform the market in the long run, he goes on to prove his theory with 30 years of statistics. He correctly predicted the dot com bubble just before it burst. He explains the success of individuals like Soros and Buffet as outliers. If you have thousands of people tossing coins one chap well get 50 heads in a row, thats how he explains the success of the handful of individuals who have outperformed the market over time,...
  • #555
  • Jan 30, 2009 6:52am Jan 30, 2009 6:52am
Quoting fugly
He explains the success of individuals like Soros and Buffet as outliers. If you have thousands of people tossing coins one chap well get 50 heads in a row, thats how he explains the success of the handful of individuals who have outperformed the market over time
Haven't heard such non-sense in years. So this "expert" describes i.e an investment-genius like Buffet's (if you don't believe he's a genius, you haven't read much about him) performance as luck..? How can even an person below average intelligent come to this conclusion ?
Measure twice, cut once
  • #556
  • Jan 30, 2009 7:02am Jan 30, 2009 7:02am
Is anything we do not based on luck? Do we not produce our own luck by hard work and persivierance? Is trading any different than running a business and spending x dollars on a marketing campaign, for those of you that are wondering about this the answer is NO its not, you have no idea about the outcome, but you do it knowing its what you need to do to try and move the needle. Nothing in life is guarenteed with the exception of death and most things in life are the result of either dumb luck - like the fact my beautiful wife decided to marry me, or luck created by hard work and persivierance.

By the way if everyone on this forum spent as much time trying to figure out good trade management as they do trying to pick entries, complaining about how its all luck, that their brokers are out to get them, or looking for a get rich quick scheme they might actually amount to a decent trader.
  • #557
  • Jan 30, 2009 7:04am Jan 30, 2009 7:04am
Quoting aediaz1
Haven't heard such non-sense in years. So this "expert" describes i.e an investment-genius like Buffet's (if you don't believe he's a genius, you haven't read much about him) performance as luck..? How can even an person below average intelligent come to this conclusion ?
I think Burton Malkiel was just jealous of Buffet.
  • #558
  • Edited 7:45am Jan 30, 2009 7:12am | Edited 7:45am
Quoting mathematician
The probability that someone would be able to consistently be profitable for over 50 years is incredibly low. The probability that there are multiple people who have been consistently profitable for many years and who are alive at the same time would be downright unbelievable.
If the theories were correct (which I do not believe to be the case) then the probabilities of you or I being consistently profitable for 50 years might be low, but the probability of there being a small percentage from a large number of traders who were consistently profitable would be quite high.
Similarly, the probability of winning the British national lottery is 1 in 14 million on any one ticket, but there are hundreds of people who have won it. These lucky winning traders would almost certainly attribute their performance to skill rather than luck whereas lotto winners would readily accept that they just got lucky. Whether the Random Walk/Market Efficiency Hypotheses are applicable or not, the element of luck still applies in the market. Traders without skill can still win, seemingly inexplicably, even have long winning streaks. Just like a 28 handicap golfer with a horrible swing can hack a ball and get a hole-in-one on their first ever round whilst a scratch golfer who has played for years never has, skill and potential ability wil not always translate into performance BUT in the long run we would expect things to equalise.

This is pretty much the premise of of Nassim's Fooled By Randomness. Well worth a read IMO.
  • #559
  • Jan 30, 2009 8:24am Jan 30, 2009 8:24am
Quoting hanover
Craig, your point that it's possible to profit indefinitely by continual adaptation might well be valid. But I was merely attempting to summarize what I saw as being the two opposing majority positions held in this thread. Tdion, FX-Petra et al apparently believe that, while profit is attainable in the short term, ultimately all P/L is due to luck (i.e. the thread title), for the reason that it's impossible for any edge to last indefinitely. (Of course that's assuming that I understand their views correctly.) However, I don't believe that such a...
Hanover,

I've been shorting the Euro on rallies since it broke 1.50. Is that luck? Well, I've been lucky in the sense that the trend has not yet reversed, but anyone can look at a 4h or daily chart and see that the trend is down, and selling rallies is a good way to make some $. I have had the sense to recognize a trend, and the good fortune to have that trend hold long enough to capitalize on it. Many good traders can do this in the short run. But the Long Run? Forget about it! Forget about flipping a fair coin, let's flip one that is weighted to produce 55% heads and only 45% tails. Even with this whopping advantange, if you flip long enough, you will hit a disaterous sting of tails that will wipe you out. No one knows when this string of negative variance will begin....maybe on your first flip, maybe on number 100,000, maybe on number 1,000,000. The only certainty you have is that if you flip long enough, it will happen. This is what I mean when I say that all will lose in the long run. It is also what I mean when I say that huge fortunes can be made in the short run.
  • #560
  • Jan 30, 2009 8:43am Jan 30, 2009 8:43am
Quoting aediaz1
Haven't heard such non-sense in years. So this "expert" describes i.e an investment-genius like Buffet's (if you don't believe he's a genius, you haven't read much about him) performance as luck..? How can even an person below average intelligent come to this conclusion ?

Well he's a princeton professor for a long time and I've read his text is recommended reading for university finance courses so we can safely assume he's not below average intelligence but possibly above average intelligence.

He really does say this and goes on to say as the market can't be outperformed its best to buy index funds, this is just the gist but he's given several other reasons.

By the way I've been wanting to read Nasseb Taleb'd fooled by randomness but I haven't been able to. Has anyone read this book?

Does Prof Taleb also believe those who have outperformed the market to be lucky? I read on another forum thats what the whole book is about. But I'm not sure. Its a book I'll definitely be reading soon.
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