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  • #21
  • Apr 13, 2009 3:28pm Apr 13, 2009 3:28pm
Quoting Leonlorenzo
how can someone lose everything when some market tendency dissapears?

.....

The blow-ups just sound like negligence to me.
Maybe easier to blow it when it's OPM (Other People's $$$)?

Otherwise, they probably face the same demons as we all do
except magnified many times over trading on that scale.

What gets me is how the people that they are trading for just watch
their accounts evaporate.
  • #22
  • Apr 13, 2009 3:32pm Apr 13, 2009 3:32pm
The blow ups are not failures of 'complicated mathematical constructs', they are a result of massive over leveraging, which is effectively the same as poor risk control. Leon, you are correct that some amount of DD will be experienced before a strategy invalidates, but the amount depends on where you set your threshold, having a structure for this is much better than having none.
The breaking of a wave cannot explain the whole sea.
  • #23
  • Apr 14, 2009 3:09am Apr 14, 2009 3:09am
Quoting Craig
The blow ups are not failures of 'complicated mathematical constructs', they are a result of massive over leveraging, which is effectively the same as poor risk control. Leon, you are correct that some amount of DD will be experienced before a strategy invalidates, but the amount depends on where you set your threshold, having a structure for this is much better than having none.

I don't entirely agree with you there. If what you are saying were correct, than every bank/institution/fund involved in the sub-prime crisis which lost immense amount of money did so because they violated the No1 risk management rule in the book - which would have rang alrm bells way before it got serious. I talk and work with a lot of fund managers; the mathematical formulae for credit derivatives, especially constructs like CDO's (Collateralized Debt Obligations) can be up to 30 pages long - and in this crisis they interviewd the guys involved inventing them - who could not clearly define the longer term implications should certain variables of the formula change.

The main failure of the formula was based on the assumption that world property prices would keep rising - or at least hold stable over the long term.

The baskets of bad debt would stay afloat (they assumed) and if a sub-prime mortgage payer would default, the property they inhabited could still be sold for a profit. That simplyfied assumption in the formula did not hold true anymore and the baskets of bad debt, which consisted of one maybe two AAA rated loans amongst hundreds of B- (sub-prime) papers, started to turn into an unforeseen liability - simultaneously around the globe since banks traded the baskets amongst each other without realizing the relative slow underlying change.

The bell-shaped options curve in the Black&Scholes model that was used in LTCM is another example.

Of course, relying too heavy on these mathemetical constructs leads often as you said to trusting the model with too much money (overleveraging) which will ultimately crack the floor it stands on - but often it would not be seen initially as overleveraging since the formulae hold true for so long and warrants the capital allocation. The is especially true when looking at derivatives where the capital involved initially does not effect the balance sheet of a bank/fund, etc.

regards
daytrading
Enter Signature
  • #24
  • Apr 14, 2009 3:22am Apr 14, 2009 3:22am
Quoting Leonlorenzo
I never understand these situations, how can someone lose everything when some market tendency dissapears? Craig has spoken to me before about measuring an edge, and how to decide when it is no longer valid statistically.

In these situations where an edge becomes worthless Id expect a sizeable DD before its detection, its magnitude depending on how much was being risked, but not a Margin-call.

The blow-ups just sound like negligence to me.
Leon,

The mass of data makes all the difference. Whether you call it backtesting, forward testing, live testing does not matter for this discusssion - what matters is this: the bigger the data set that you look at for a certain market pattern or behaviour and the more of the patterns it contains, the easier it is to detect fluctuation in one direction (increased profitability) or the other (beginning of draw-downs).

For example if your model trades 100 times/week and over the last 5 years it continuosly averaged 60 winning trades and over a period of let's say 3 month the average goes below any of your recorded averages, you need to start looking for possible adjustments. It does not mean that it goes from 60/40 in one week to 10/90 negative in the next - IF your data set has performed in a steady manner for long enough previously.

The problem that many traders don't see is how difficult it is to create and maintain an edge that outperforms shifts in market behaviour which are not obvious when looking at a few month of M5 charting.

regards
daytrading
Enter Signature
  • #25
  • Apr 14, 2009 10:41am Apr 14, 2009 10:41am
Quoting daytrading
The problem that many traders don't see is how difficult it is to create and maintain an edge that outperforms shifts in market behaviour
This is the part that gets me (makes me crazy - LOL). If an edge is something that exploits a certain condition then, how is it supposed to work as conditions change, i.e. continuously? It just seems to me the best way to go is to define a way of trading that works only under certain limited conditions. Then only trade when that window exists. Your job then becomes qualifying and/or quantifying conditions and executing your pre-defined plan when the time (condition) is right.

Thanks for all of the posts!

BTW: What's up Leon!
  • #26
  • Apr 14, 2009 12:24pm Apr 14, 2009 12:24pm
Quoting FXSurfer

Thanks for all of the posts!

BTW: What's up Leon!
Nothing much mate, just enjoying the conversation that comes up when we manage to get some of the straight talking members involved.

Leon
Living the adventure in my head.
  • #27
  • Apr 14, 2009 3:15pm Apr 14, 2009 3:15pm
Quoting Leonlorenzo
Nothing much mate, just enjoying the conversation that comes up when we manage to get some of the straight talking members involved.

Leon
Likewise. Far and few between they are!
  • #28
  • Apr 14, 2009 5:02pm Apr 14, 2009 5:02pm
Quoting FXSurfer
This is the part that gets me (makes me crazy - LOL). If an edge is something that exploits a certain condition then, how is it supposed to work as conditions change, i.e. continuously? It just seems to me the best way to go is to define a way of trading that works only under certain limited conditions. Then only trade when that window exists. Your job then becomes qualifying and/or quantifying conditions and executing your pre-defined plan when the time (condition) is right.
Successful traders do this, either consciously or subconsciously, I think. They look to trade a certain way during certain market conditions that they know their system works in, which is similar to how certain indicators work well during specific periods and not at all in others. Consider a ranging market, where stochastics and other oscillating overbought/sold indicators can work really well at defining points of exhaustion, but where it's essentially useless in a strongly trending market.

Consider that some traders trade only breakouts (a pretty specific and limited condition), while some only trade ranges, some only scalp extremely overbought/sold conditions, etc.

Of course, none of this should be news to anyone. Executing your plan when the time is right has always been how a trader makes money and will always be the toughest part of his job.
  • #29
  • Apr 14, 2009 9:53pm Apr 14, 2009 9:53pm
Anyone else here found them-selves forgetting about making money when on the quest to learn about the markets and devise a working trading method?

Its the strangest thing, yet im not sure wether it shows a healthy obsession with the markets or a total lack of sanity/sense of purpose, lol.
Living the adventure in my head.
  • #30
  • Apr 15, 2009 12:22am Apr 15, 2009 12:22am
Making money as in not working for daily needs? Been there done that. Its destructive for me, both in trading and life.

I think dedication is good, but obsession is bad.
  • #31
  • Apr 16, 2009 8:11pm Apr 16, 2009 8:11pm
Quoting newborn
Making money as in not working for daily needs? Been there done that. Its destructive for me, both in trading and life.

I think dedication is good, but obsession is bad.
No, my comment was regarding the fact that I dont think about 'getting rich' when thinking about trading anymore. Not to say that I wouldnt like to get rich trading, I just see this as something I realy want my life to be centered around.
Living the adventure in my head.
  • #32
  • Apr 16, 2009 8:20pm Apr 16, 2009 8:20pm
Ok, I have a question about the Often quoted statement that the Forex market is the most trending market in Existence.

Does anyone have a clue about the basis on which this statement is made?

The reason I ask is that I have been contemplating the strategy I breifly tested In my journal, and although trends In my direction were obviously beneficial, strong trending against my possition caused losses. Lots of Ranging movement is what I would consider as a prime condition and likely better for the overall strategy than having strong trends In my direction. There is a possibility that other markets may be better suited for that particular method.
Living the adventure in my head.
  • #33
  • Apr 16, 2009 8:50pm Apr 16, 2009 8:50pm
My opinion (for what it's worth) is that the quoted statement is just marketing bullshit designed to sucker in new clientele. Given any market grouping (forex, futures, stocks) there will be specific markets within each grouping which have more of a tendency to trend and/or range, but even this will change dynamically with time. If anything one could argue that forex markets are more efficient than say stocks due to the limited amount of markets and the number of people competing within them.
The breaking of a wave cannot explain the whole sea.
  • #34
  • Apr 16, 2009 10:45pm Apr 16, 2009 10:45pm
Quoting Craig
My opinion (for what it's worth) is that the quoted statement is just marketing bullshit designed to sucker in new clientele. Given any market grouping (forex, futures, stocks) there will be specific markets within each grouping which have more of a tendency to trend and/or range, but even this will change dynamically with time. If anything one could argue that forex markets are more efficient than say stocks due to the limited amount of markets and the number of people competing within them.
I considerd the fact that It may have just been marketing hype, but I figured there has to be some truth to It since so often mentioned when describing the currency markets. Ive never so much as looked at a chart of anything other than FX so dont realy know how other markets behave in contrast to it.
Living the adventure in my head.
  • #35
  • Apr 25, 2009 6:37pm Apr 25, 2009 6:37pm
Hi,

First of all, it is difficult to know whether price has a higher probability of continuing in the direction of the 100 pip move or reversing. (Especially if you are using past data). However, some things may help:

1. You can do some reading on fractal finance, power law scaling, and the Hurst Exponent. A calculation on historical data yielding a Hurst Exponent of 0.5 indicates random motion, > 0.5 indicates trending behavior, and < 0.5 indicates anti-trending motion.

2. A more subjective method would be to analyze the cause of the price movement. If it was a fundamentally supported move, then it's likely that it will continue. If it was based on profit taking or the market coming to too quick of a conclusion on a data release, a reversal is more likely. If you are interested in this, you can read up on behavioral finance.
  • #36
  • Apr 25, 2009 6:50pm Apr 25, 2009 6:50pm
Lorenzo,

I don't know the complete answer to the question, but a main reason for currencies being perceived to trend for the longest periods of time is because of currency pair movement over very long time periods is based on carry. When volatility is at normal to low levels, currencies with relatively higher yields will attract more capital. Central banks take a long time to shift from interest rate hiking to cutting cycles, and the economic consequence can be felt up to multiple years later. Currencies, being macro instruments, are not completely dominated by speculative trading like stocks, so price more often trends with macro investment flows as opposed to speculative swings.

As far as whether they really trend that well, I would say it depends on the time frame, but all financial markets are very correlated, so I wouldn't be too quick to believe that.

Hope this helps,

Kris Matthews
  • #37
  • Last Post: Feb 26, 2011 12:10pm Feb 26, 2011 12:10pm
I have always wondered how the order of primary and secondary currency was determined when currency pairs were created.

For example we have pairs like USDCHF, USDJPY where USD is the prefix. Whereas currencies like GBPUSD, EURUSD have USD as suffix.

Whats the logic behind this?
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