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Long term Profits within Negative Expectancy

  • #21
  • Aug 18, 2009 1:40am Aug 18, 2009 1:40am
Quoting magicchance
@Hanover. I know who you are here and I respect you very much. I'm not a programmer like you, I'm just a small time trader with much to learn.

The results I just posted are 100% true and accurate. I will be the first to admit that the 198 pips out of a possible 206 sounds extreme, and it is. It was a good week and it surprised even me. But I must also say that my normal win ratio is a SOLID 75-80%, and has been since last year.
If you're achieving anything like 1:1 RR with a 75-80% win rate, then your trading is way ahead of mine. Hence it is I who should be respecting you.
  • #22
  • Aug 18, 2009 2:23am Aug 18, 2009 2:23am
Thanks for sharing infor here


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  • #23
  • Aug 18, 2009 3:16am Aug 18, 2009 3:16am
I thought trading was a game of continuously changing strategy to suit the continuously changing conditions of each trade and the market. Apart from perhaps an initial set risk limit, where are the constants which allows for number crunching statistics like this, is every trade handled in the same way?

Do most successful traders really operate with a rigid entry/stop/limit on a single directional trade, don't most consistently profitable traders think on their feet as a trade unfolds and have an arsenal of different tactics to reduce risk and maximize profit?

I suppose these stats would be valid for an automated system which has a rigid set of rules, but for discretionary trading, really?
  • #24
  • Aug 18, 2009 4:35am Aug 18, 2009 4:35am
Quoting pipmutt
I thought trading was a game of continuously changing strategy to suit the continuously changing conditions of each trade and the market. Apart from perhaps an initial set risk limit, where are the constants which allows for number crunching statistics like this, is every trade handled in the same way?

Do most successful traders really operate with a rigid entry/stop/limit on a single directional trade, don't most consistently profitable traders think on their feet as a trade unfolds and have an arsenal of different tactics to reduce risk and...
Hi,

Firstly, there is a difference between 'automated' and 'mechanical' - but to answer your question about trade handling, yes, every trade is handled in precisely the same way.

When you step into a casino to play the roulette wheel, you have already lost because the casino has the statistical edge.

Good traders don't think how to beat the casino - instead they think like the casino and construct edges. Every casino 'knows' their edge even when they pay out to a great amount of people who play a little bit of 'red or black' or 'even vs uneven'.

Ultimately, the casino is in the game non stop and with the 'zero' in the wheel, the law of large numbers puts the odds in the casino's favour.

The casino uses money management as well. There is a limit to every game, hence the casino knows the maximum downside - which is always smaller than the ultimate upside.

The casino also uses risk management - for the odd clever guy who comes into the casino to count cards in black jack - if he wins too often for their taste, he will get kicked out.

The casino (like a good hedge fund) uses diversication in the portfolio. There are many games in the casino from slot machines to black jack tables to roulette etc. All have a statistical advantage over the player - some smaller some larger, but always in favour of the casino. So, even if in one night here and there, a payout happens on one of the one-armed bandits, the other games (or strategies) will cover for that (small) loss.

Even if the game looks like complete luck to the observer (like rolling dice), ultimately there is no luck involved - since bet size and rules of the game ensure that in the long run the casino wins.

Games like the ones you find in casinos have been created in the same way that modern portfolio managers create strategies with precise rules - whether those rules have more emphasize on the money management and less on the (precise) entry of a market (more discretionary one could argue) in order to catch bigger moves less often, or whether the entry and exit are precision made to capture an advantage over very many trades (throws of the dice) does really not matter and is more of an individual choice.

And yes, this is a relatively simplyfied way of explaining it - roulette probabilities are fixed for eternity unlike market behaviour (you will always find 37 numbers on the wheel, 18 red, 18 black, and one green), that is why you never see a casino go bust. In the financial markets, edges can be created but have to be carefully monitored in terms of results over time. Should results fall outside 'regular' parameters (either too negative or too positive), something might be about to change.

regards
daytrading
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  • #25
  • Aug 18, 2009 5:19am Aug 18, 2009 5:19am
@daytrading,
excellent write
To Live is the rarest thing in the world , Most people exist , that is all
  • #26
  • Aug 18, 2009 5:19am Aug 18, 2009 5:19am
Quoting daytrading
every trade is handled in precisely the same way.
Hi daytrading

And maybe that's an unnecessary limitation, maybe it's more logical to handle them according to reality (market conditions) rather than a pre-calculated set of inflexible rules devised by the trader. Just becasue a strategy dictates a 1:2 risk:reward doesn't mean the market will oblige, and what happens if after entering a trade it only ends up offering 1:0.5, do you wait for the stop to trigger and take a loss or move stop to breakeven because the strategy says so rather than take the profit available?

I've read the casino comparisons before but I don't believe they're a valid argument. In a casino there are quantifiable (is that the right word?) constants, for example the numbers on a roulette wheel never change. In markets the numbers (conditions and sentiment) are always changing and need adapting to sometimes on a trade-by-trade basis to accommodate that change.

In roulette you place your bet and are at the mercy of the wheel and a little ball, you can't change your strategy mid-spin to reduce your risk or maximize your profit. In trading the opposite is true, you can adapt according to the market, reduce your risk, hedge your risk, take partial profit or loss, re-enter, increase/decrease your bet.....the combinations are endless and only limited by one's imagination! We can't change what the market does but we can change what we do in relation to what it's doing.

Some people view their broker as a casino and spread as the brokers edge. I suppose it depends on how one thinks of the market and their broker but I see the broker as a service provider to facilitate my trading activities, and spread as simply the cost of doing business.

I suppose the bottom line is how a trader chooses to trade, either with a rigid mechanical approach in which case these stats might mean something or a flexible discretionary one in which case they don't. I go for the latter but each to their own as they say
  • #27
  • Aug 18, 2009 5:44am Aug 18, 2009 5:44am
Quoting pipmutt
Hi daytrading

And maybe that's an unnecessary limitation, maybe it's more logical to handle them according to reality (market conditions) rather than a pre-calculated set of inflexible rules devised by the trader. Just becasue a strategy dictates a 1:2 risk:reward doesn't mean the market will oblige, and what happens if after entering a trade it only ends up offering 1:0.5, do you wait for the stop to trigger and take a loss or move stop to breakeven because the strategy says so rather than take the profit available?

I've read the casino comparisons...

Firstly, I said that this is a simplified explanation. Take a game of cards if you don't like the analogy with roulette - it gives you a variety of choices how to play your cards. The result, nevertheless will still be in favour of the casino - rest assured.

Secondly, if you read my earlier post you will have noticed that I do exactly that: I do take a loss if the market does not 'oblige' as you said - for the simple reason that I have a statistical advantage which I can trust. At the end of a trading cycle (one year for example) I end up with profits which are relatively constant.

Also, I seems you haven't understood what I was trying to convey - of course you are at the mercey of the wheel - as the guest in the casino - but not as the casino itself. No mercy there, they will always take the money in the end.

You have to look at it this way - even your so called discretionary approach depends on rigid rules, to bend the rules according to specific situations can be one of them - a programmer would call this an overriding rule. Also, if you take your trades (a good number of them, lets say a thousand) and put them in a matrix, which shows a profit at the end, it displays a statistical advantage - however you may wish to call it.

If one cannot define an edge, it is surely proof of the absense of it.

regards
daytrading
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  • #28
  • Aug 18, 2009 5:50am Aug 18, 2009 5:50am
I agree with the OP's view within the realm of "scalping" type strategies. If you really trade retail Forex (as in market makers where you are forced to buy at the ask and sell at the bid) and your targets and stops are really within the scale of 10 pips or so, then you really are playing a negative expectancy game.

I tried this when I first experimented with Forex. Coming from a prop trading background with the NYSE stocks and routing my orders through Arca and Millennium, my scalping was a positive expectancy game because I could simply enter at the price stalls and get a buy filled at the bid or a sell filled at the ask (I got paid for adding liquidity by Arca and then paid a smaller fee by routing the exit order through Millennium). This was a positive expectancy game and those of us who did it would do it very frequently for 2 to 10 cents (equivalent to pips in Forex). Without much delay, I figured out just how impossible this method was to pull off in retail Forex. Even on ECNs, the commissions cause the same negative expectancy because we can never get paid for adding liquidity in this market.

But, also keep in mind the effect that larger stops and targets have on this picture.

Say you have a 0.9 pip spread on EUR/USD on OANDA. Or even the typical 2 pip spread on most other retail brokers. If you trade Daily and Weekly support and resistance, your typical targets and stops are in the realm of 100 to 400 pips. The spread has a very tiny impact on this.

Secondly, a lot of support and resistance levels negate your theory of a random 1:1 R-R. Even in the short term, when price moves toward a "double zero" price level (like 1.6500 or 1.4100), the probability of making a move straight through that level is NOT 1:1. In fact, even if you scalp (not that I would recommend this), the odds of price stalling on the first touch of the level before eventually continuing is still higher than just going straight through without a pause.

To put the same logic into a much more realistic picture, consider a major resistance level like the GBP/USD's 1.7000. That's a big one partly because it's a "triple zero" number. On levels like that, if a continuation fails, it may manage to get through by maybe 50 pips or so, but very unlikely to continue. So if you trade on the daily charts, and you saw that level coming up, and then the way price acted at the level over the entire week when it consolidated there, it doesn't take a genius to try shorting it there with a 120 pip stop (a little excessive, I know, but safe) and a 240 pip target. That's not 1:1 Risk-reward, yet the probability was actually higher than 50% because the resistance "zone" was very clearly showing a failure to break during the week that consolidated around there.

Another scenario is news spikes. After a big news announcement, and price spikes up violently and stops cold, then slowly trickles back toward where it came from, the probability of continuing or retracing is, again, NOT 50%. In fact, if all you did was wait for these news spikes to stall and just fade it, you should have a little edge even if you might lose once in a while (if the entry was too early and there was more room to go). I haven't collected statistics on this, but just from 3 years of real market experience, I'd say the chances of this short term reversal is higher than 52%.

I admire your methodical mathematical approach to this, but sometimes things aren't always that black and white. As long as you don't trade with static 1:1 stops and targets with random entries at random price levels, you're not always playing a negative expectancy game even with a giant spread against you.

Just my 2 cents.
  • #29
  • Aug 18, 2009 6:07am Aug 18, 2009 6:07am
Quoting daytrading
Take a game of cards if you don't like the analogy with roulette - it gives you a variety of choices how to play your cards. The result, nevertheless will still be in favour of the casino - rest assured.

If one cannot define an edge, it is surely proof of the absense of it.
We can agree on that one, if you don't know your edge then you probably don't have one

As far as playing cards goes, casinos were losing big time due to card counting, they had to move the goal posts to give them back their edge. For a while the results were clearly not in favor of the casinos! But even in cards there are a limited number of strategies and tactics, not so in trading.

I don't want to go off on a tangent here, the thread topic is very interesting.
  • #30
  • Aug 18, 2009 6:31am Aug 18, 2009 6:31am
Quoting pipmutt
We can agree on that one, if you don't know your edge then you probably don't have one

As far as playing cards goes, casinos were losing big time due to card counting, they had to move the goal posts to give them back their edge. For a while the results were clearly not in favor of the casinos! But even in cards there are a limited number of strategies and tactics, not so in trading.

I don't want to go off on a tangent here, the thread topic is very interesting.
Of course. What you are saying here is the very essence of the whole game: the trader has to think and act like the casino - and not the guest. Your example of the casino 'moving the goalpost' is precisely what funds and successful traders do; they observe whether and when a strategy's edge decreases or fails (in your example because of card counting), and then adjust.

But as long as the employed strategy (and with this back to the topic) has a positive expectancy (which is shown by the results over time as a mathematical function), there is no need to apply any changes.

As the thread starter pointed out correctly, cost can be a very significant hurdle, depending on what inefficiency the [a] strategy is aiming to exploit.

regards
daytrading
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  • #31
  • Aug 18, 2009 6:47am Aug 18, 2009 6:47am
Quoting daytrading

But as long as the employed strategy (and with this back to the topic) has a positive expectancy (which is shown by the results over time as a mathematical function), there is no need to apply any changes.
Ok and this is where I get stuck. How can a discretionary strategy which has only very basic fixed rules (ie maximum worst case risk) and which constantly changes according to market conditions be presented mathematically as having a statistical expectancy, there are simply way too many variables, and even the variables can change on the fly depending on another set of even more variables!

I'm not trying to be argumentative here, I just don't see how a mish mash of discretionary tactics can be unraveled and presented as a neat statistic.
  • #32
  • Aug 18, 2009 7:03am Aug 18, 2009 7:03am
Quoting pipmutt
Ok and this is where I get stuck. How can a discretionary strategy which has only very basic fixed rules (ie maximum worst case risk) and which constantly changes according to market conditions be presented mathematically as having a statistical expectancy, there are simply way too many variables, and even the variables can change on the fly depending on another set of even more variables!

I'm not trying to be argumentative here, I just don't see how a mish mash of discretionary tactics can be unraveled and presented as a neat statistic.
Because unless you enter the market on a random basis with no regard for how large your losses might get (i.e. ultimately total capital erosion), there are rules present. Even a single rule which would say for example that you only risk a maximum of X% of your capital per trade, week, month or year can be used statistically.

Basically if it becomes a repeatable process in the simplest form, you can measure it.

That does not make it automatically profitable, but statistical analysis relies in many ways on the amount of occurrences. If something happens often enough, and results are skewed in one direction, it is a statistically viable result.

One could for example create a scenario where one enters the market every morning at 8am GMT and closes at 6pm GMT with a fixed loss limit of 0.05%.

You would have to repeat it forward or via back-test for 10 years of data and you get your expectancy. The more variables you throw in (i.e. you only trade long when the last candle before 8am GMT is up and vice versa for shorts) the more your results will sway to one end of the spectrum to another. That in turn will determine how useful your edge might be.



regards
daytrading
Enter Signature
  • #33
  • Aug 18, 2009 8:17am Aug 18, 2009 8:17am
Quoting daytrading
Because unless you enter the market on a random basis with no regard for how large your losses might get (i.e. ultimately total capital erosion), there are rules present. Even a single rule which would say for example that you only risk a maximum of X% of your capital per trade, week, month or year can be used statistically.
daytrading, thanks for the explanation, it kind of makes sense to me but I don't want to hijack the thread so I better leave it there!

I'm still not sure what a matrix would make of my last 1000 trades, there would only be one fairly static rule about risk to put into it.

I'll go back to reading....
  • #34
  • Aug 18, 2009 8:20am Aug 18, 2009 8:20am
Quoting pipmutt
daytrading, thanks for the explanation, it kind of makes sense to me but I don't want to hijack the thread so I better leave it there!

I'm still not sure what a matrix would make of my last 1000 trades, there would only be one fairly static rule about risk to put into it.

I'll go back to reading....
you're welcome

regards
daytrading
Enter Signature
  • #35
  • Aug 18, 2009 2:33pm Aug 18, 2009 2:33pm
Quoting hanover
@FX-Petra, great post, and it has elicited some very thought-provoking replies. Should be manadatory reading for newbies, and a reality check for the complacent among us.

As you also correctly point out, a small edge (plus conservative MM) is all that's (potentially) needed to grind out a life-changing profit. We always seem to be reading about the importance of discipline, but for me finding a genuine methodological edge has proved to be the most difficult element. Does a (TA-based) edge, and I mean one with the potential to last a lifetime,...
Great to hear from you, David! I hesitate to start such a thread, because so many respond who have no real idea what they are talking about. I do not say that with an air of superiority---far from it!!! Just that it takes several years of experience to cut through the drivel of your own mind and to have a clear direction and purpose. No discretionary trading method can survive long term. I am not going into the mathematics of it all, as many people would be offended by mathmatical certainty. The ONLY long term winner is a strategy with definable measurable edge. Such a stategy may well exist--- but if so, they ain't sharing!!! Thanks for the Darkstar reference--that is one of my favorite quotes! You have to have been around a while to still be quoting Darkstar! I am still working on finding that edge (if it exists), but have had no breakthoughs. Oh well, they played blackjack for many years until Mr. Thorpe busted that game wide open! All the best to you!
  • #36
  • Aug 18, 2009 2:38pm Aug 18, 2009 2:38pm
Quoting Chicky
What a great post! what a great post! Thanks for sharing views......................... However, would like to express these two differing opinions in view of the last sentence (bold above).

1. Forex trading is not just mathematics, statistics and patterns - real economic factors support mega moves and trends. Therefore positive expectancy is most probable for informed and "smart" traders. By smart I mean traders who are aware of short-term abrupt behavior of market and accordingly manage their positions and funds.

2. If a trader is "consistent"...
I wish you well, Chicky. I will say this.... Consistency will make your losses more predictable. Unless you are trading with an edge, your gains are a result of positive fluxuation within a downward sloping equity curve. Bookmaking, on the other hand, is a great business if run well...just lay your risk off as much as possible and collect the juice!
  • #37
  • Edited 3:36pm Aug 18, 2009 2:54pm | Edited 3:36pm
Quoting FX-Petra
No discretionary trading method can survive long term. I am not going into the mathematics of it all, as many people would be offended by mathmatical certainty. The ONLY long term winner is a strategy with definable measurable edge
Are you saying a discretionary trading method has no edge?

From your other posts it seems like you're saying trading isn't profitable, period. What a very odd assumption to make!

Sorry but that is absolute nonsense. Plenty of impressive theory and number crunching statistics but nothing practical. Didn't you know, there are more barrow boys than Harrow boys in the square mile, and now I begin to understand why.

I may not be a mathematics genius but I certainly know how to read a broker's statement and a trading blotter!

Amazing, I simply wouldn't believe it unless I read it with my own eyes.....
  • #38
  • Aug 18, 2009 4:30pm Aug 18, 2009 4:30pm
Quoting FX-Petra
I wish you well, Chicky. I will say this.... Consistency will make your losses more predictable. Unless you are trading with an edge, your gains are a result of positive fluxuation within a downward sloping equity curve. Bookmaking, on the other hand, is a great business if run well...just lay your risk off as much as possible and collect the juice!
Petra, I will highly appreciate if you could add some more to the above bold sentence. I didn't get it.

Bookmaking is great business for those who can assess the risks and calculate the odds. Ceding risk is primary but the next step in balancing books. The people who wait for leading bookmakers to set the opening rates are in fact no bookmakers just punters disguised as bookmakers.
The Thief of Wall Street
  • #39
  • Aug 18, 2009 4:54pm Aug 18, 2009 4:54pm
Quoting daytrading
Hi,

Firstly, there is a difference .....And yes, this is a relatively simplyfied way of explaining it - roulette probabilities are fixed for eternity unlike market behaviour (you will always find 37 numbers on the wheel, 18 red, 18 black, and one green), that is why you never see a casino go bust. ...
Daytrading, It would be very unfair not to appreciate your this post.

The biggest edge a Casino enjoys is unlimited flow of money and time capital as compared to limited capital available with punters. Revese the odds in favor of punters without allowing them to increase their "capitals", they would still lose.
The Thief of Wall Street
  • #40
  • Aug 19, 2009 2:26am Aug 19, 2009 2:26am
Negative sum, another blinkered assumption from the math and stat gurus that speculative forex trading is zero or negative sum (the operative word being speculative, not all transactions in the market are for speculation, there are many different participants).

Academic qualifications are no substitute for common sense and practical experience!

Number crunchers and bean counters, ya gotta luv 'em

Merlin on the other hand is referring to the forex market as a whole, and as such it is negative sum.
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