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Long term Profits within Negative Expectancy

  • #41
  • Aug 19, 2009 2:49am Aug 19, 2009 2:49am
Hi all, I am a new member of forum

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  • #42
  • Aug 19, 2009 3:02am Aug 19, 2009 3:02am
Quoting pipmutt
Are you saying a discretionary trading method has no edge?
By definition something that is not defined cannot have quantifiable edge.
  • #43
  • Aug 19, 2009 3:03am Aug 19, 2009 3:03am
Quoting LasVahGoose
Sorry for the noobish question. I've read a similar description of what you stated only it was called Negative Sum. I was wondering if you felt there was difference between a negative sum game vs. a negative expectancy game?


EDIT: Here is a post regarding zero sum / negative sum by Merlin.

Nice post by Merlin.
http://www.forexfactory.com/showpost...8&postcount=14

zero sum, in the raw sense of the definition, means if i win $1, someone else lost $1.

the reason a zero sum game can become a negative sum game is...

The FX Cash market - contrary to assumptions - is NOT a zero sum game.

FX futures are.

regards
daytrading
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  • #44
  • Aug 19, 2009 3:10am Aug 19, 2009 3:10am
Quoting mikkom
By definition something that is not defined cannot have quantifiable edge.
How about if it's definition is a complex set of variables on variables?

Does it make any difference if it's edge is quantifiable, whose benefit is that for, a statisticians? Isn't the important thing consistency and profitability ie practical results?

Didn't gurus of the day say a plane wouldn't be able to fly?
  • #45
  • Aug 19, 2009 3:12am Aug 19, 2009 3:12am
Quoting pipmutt
Does it make any difference if it's edge is quantifiable
For me yes definitely, for you - I have no idea. How you cope with periods of long drawdowns, change your strategy?
  • #46
  • Aug 19, 2009 3:22am Aug 19, 2009 3:22am
Quoting mikkom
For me yes definitely, for you - I have no idea. How you cope with periods of long drawdowns, change your strategy?
No need, it doesn't have any rigid rules apart from limiting initial risk, a good strategy reacts and adapts to the reality of the market which seems like the logical thing to do in my opinion. Long periods of drawdown are totally unnecessary, they just demonstrate a delay in reacting to what is actually happening in the market.
  • #47
  • Aug 19, 2009 3:27am Aug 19, 2009 3:27am
Quoting daytrading
The FX Cash market - contrary to assumptions - is NOT a zero sum game.

FX futures are.

regards
daytrading
How so Daytrading? Putting aside swaps and commissions, the motivation of its participants doesn't affect the reality (so some people are not trading for profit for eg). So how is this not zero sum?
  • #48
  • Edited 4:23am Aug 19, 2009 3:38am | Edited 4:23am
Quoting Chicky
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 analogy between casino's and the markets per-se is of course slighly abstract, so the basic idea has to be transferred.

If you compare the individual (financially limited) retail trader with a multi-billion hedge fund for example, similarities can be established by the position each is holding compared to the whole market.

Now, funds have constant exposure in the market, a bit like the casino has guests coming in with the majority leaving money there. In the same way, assuming its an overall profitable fund, i.e. a global macro, most of the strategies (game tables) are in play all the time and producing profits.

If you would 'reverse' the odds, the casino would of course lose because compared to the casino's bank itself, all the punters that come in the casino in a period of one year, with the same betsize I might add, would instead of leaving their money take home small winnings, the casino bank would ultimately dry up. The 'unlimited flow of money' as you put it is only exists because the odds are in fact in favour of the casino.

The combined amount of people going into a casino suddenly, on average, win what they are in reality losing, where do you think the casino would get the money to pay for the guests winnings after a revesal of the odds?

In the same sense, if the fund (or for our discussions sake) professional retail trader has not got an edge (or the odds in his/her favour), he will go to the market and be the guest rather than the casino.

I know that all might sound a little too abstract but think of the whole story like this:

finacial market as a whole = liquidity (or money flow)

trader or institution with statistical edge = casino

trader (or institution) without stat. edge = guest in the casino

It is very important not to see the anonymity of the market which is nothing but liquidity "in fluctuation" as the casino in this example.

There are many casinos, like there are many profitable funds and traders - but there are more 'guests' as well as unprofitable traders (and some unprofitable funds).

Ok, I am digressing here but the main point is: don't see the market itself as the 'casino'. The market is 'liquidity' - the trader is either a GUEST (losing because no edge) or the trader is a CASINO (trader with edge) tapping into the liquidity pool.

regards
daytrading
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  • #49
  • Aug 19, 2009 3:47am Aug 19, 2009 3:47am
Quoting triphop
How so Daytrading? Putting aside swaps and commissions, the motivation of its participants doesn't affect the reality (so some people are not trading for profit for eg). So how is this not zero sum?
Triphop,

The following excerpt is from a study produced by a couple of professors in the fund industry:

12

Hochradl and Wagner 2007.


13 Brunnermeier, M . et al., 2008.

14

Gray, R.W. and D.J.S. Rutledge. 1971


B. Speculators, Hedgers and "Zero-Sum" Trading
Futures and forwards trading are often thought of as a "zero-sum" game. Since futures contracts are created by one party going long while another goes short, every price change of the contract leads to equal gains and losses. If all futures traders had positions only in futures contracts and they traded only with each other, then all profits and losses would sum to zero (ignoring the interest earned on margin cash). This is in contrast to a cash market, such as single stock equities, where an up move in the stock market would create net wealth if there were a net long position amongst all participants.
This concept depends on the assumption that all futures traders only have positions in futures markets. In reality, a large portion of participants in the futures markets are hedgers who operate businesses that need to hedge commodity, currency and interest rate risk. In addition to these traditional hedgers, there are speculators such as market-makers and arbitrageurs that access the futures market to hedge across asset classes. These agents link the futures and cash markets together, expanding the closed system to an open one where trading is not constrained to be zero-sum.
Thus the expected value of trading in futures markets for speculators as a whole is in fact non-zero in practice. The Keynesian notion of a "natural risk premium" suggests this expected value should in fact be positive;14 he argued that speculators in futures should receive a positive expected value by assuming a risk transfer from hedgers.
In summary, futures traders can benefit from the wealth transfer across asset classes by traditional and non-traditional hedgers. The long track record of systematic global macro empirically supports this conclusion.
- 9


regards
daytrading
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  • #50
  • Aug 19, 2009 3:49am Aug 19, 2009 3:49am
Quoting daytrading
The analogy between casino's and the markets per-se is of cours slighly abstract, so the basic idea has to be transferred...
There are very few times when i wish i could vouch for someone but this is one of them. Thanks DT, thoroughly enjoying this thread.

Dan
  • #51
  • Aug 19, 2009 3:50am Aug 19, 2009 3:50am
Quoting pipmutt
Long periods of drawdown are totally unnecessary, they just demonstrate a delay in reacting to what is actually happening in the market.
This all depends on your strategy, in low win%, very high win amount type trading you will have periods of drawdowns (not necessarily long but anyway we might have a different perspective on long). So I assume you are trading higher win / lower win amount type systems.

I personally just couldn't trust anything that I wouldn't know works on at least 5-10 years of data but that's just me, It's all matter of perspective.
  • #52
  • Edited 5:01am Aug 19, 2009 4:24am | Edited 5:01am
Quoting mikkom
This all depends on your strategy, in low win%, very high win amount type trading you will have periods of drawdowns (not necessarily long but anyway we might have a different perspective on long). So I assume you are trading higher win / lower win amount type systems.
I'm trading the market as it is in reality with no preconceived ideas of what a trade might or might not offer, it could be a quick scalp or a longer term positional trade, the market makes that decision and it has a funny way of disregarding anything I might think! That seems like a logical approach to me.


Quoting mikkom
I personally just couldn't trust anything that I wouldn't know works on at least 5-10 years of data but that's just me, It's all matter of perspective.
Sure, and I can understand the feeling of security that might offer, it's whatever we're comfortable with and gives us the confidence to pull the trigger which matters. But markets change, this past year is a perfect example and the reason some people who were too slow to notice and react lost their shirt or had some spectacular drawdowns.

Each to their own as they say, if a method produces consistent profit then it simply can't be 'wrong', statistically number-crunched or not!
  • #53
  • Aug 19, 2009 4:34am Aug 19, 2009 4:34am
Thanks for the excellent posts and articles daytrading, I might not always agree with everything you say but you make a great debate!
  • #54
  • Aug 19, 2009 4:44am Aug 19, 2009 4:44am
AstonDan,

Thank you for your kind words.

Pipmutt,

Thank you too - and its quite alright that we don't agree on everything - if we all did all of the time, there wouldn't be any markets to trade and nothing to discuss.

regards
daytrading
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  • #55
  • Aug 19, 2009 7:19am Aug 19, 2009 7:19am
Quote
Conclusion. Please do not take this to mean I am a kill joy! I have traded forex for quite a few years and have had periods of great success, along with great disaster. I still trade from time to time, but I do it for fun, somewhat akin to casino gambling. If you are trading retail for any other reason that this, you will be disappointed. You may be successful for a few months or even years, but in the end if you trade long enough you will be wiped out.

Really funny post, i will take you seriously at your statement that "Trading retail forex is a negative expectancy activity"

One can achieve a huge edge in retail forex utilizing simple price action ....smart money management and a little flair in the old know when to break your rules department

No debate my friend ...... the many thousands of people who make their living from trading financial markets and have so for many many years are simple proof that this is so.

I agree that trading retail fx with a robot / mathematical model is a negative expectancy activity (had to look that one up )

P.S ... loosers in a row..... my system gives me 9 or 10 loosers in a row sometimes......not too worried with a 20 pip stop and 100 pip target tho
  • #56
  • Aug 19, 2009 7:33am Aug 19, 2009 7:33am
Quoting Rise

I agree that trading retail fx with a robot / mathematical model is a negative expectancy activity (had to look that one up )

P.S ... loosers in a row..... my system gives me 9 or 10 loosers in a row sometimes......not too worried with a 20 pip stop and 100 pip target tho
So...what is your system but a mathematical model?

All a person is, is a complex machine, there is no reason why a computer can't do what a trader can, and most likely it will do it better, just look at chess, poker etc.
  • #57
  • Aug 19, 2009 7:52am Aug 19, 2009 7:52am
Quote
So...what is your system but a mathematical model?

All a person is, is a complex machine, there is no reason why a computer can't do what a trader can, and most likely it will do it better, just look at chess, poker etc.

True.

In theory a robot/mathematical model could adapt to the markets with creative intelligence.
I will stick to what i know........

P.S any long term positive expectancy black boxes out there ??? never seen one myself.
  • #58
  • Aug 19, 2009 9:21am Aug 19, 2009 9:21am
Several have asked me to try to further explain my thoughts. It is complicated, but I am a teacher by trade so I will give it a shot!

The absoulute minimum required to be profitable is a system (discresionary or robotic) that can overcome the spread and yeild +1 pip. That is it, period. Every thing after that simply displays how much equity you have in your account and how much "draw down" you can withstand. The mathmatical elements of any system are 1) risk-reward ratio and 2) win percentage 3) spread amount (or negative expectancy %). Consider the following:
($reward*win%) - ($risk*loss%)= Profit/Loss of equity

example: You have a system that has a 30 pip take profit and a 20 pip stop loss. You have a 40% win rate. You trade a 10 dollar pip.

(300*.4)-(200*.6)= 0 profit/loss

You are very close... you need only keep all parameters constant while finding a way to increase your win rate to 41% and you will be rich beyond all imagination. I think you will find achieving that extra 1% by looking at charts and making analysis a futile exercise. Yes, if you have some access to information the masses do not, you can do it. If you have access to enough money to move the market yourself during low liquidity periods and run stops, you can do it. Absent those conditions, you cannot.

I do not want to make this a math geek discussion. Suffice it to say that the bell curve nicely accounts for traders that find themselves in profit at this moment. If that is you, please know that the bell curve is working against you the longer you trade and as time goes by trades amass and it becomes harder and harder to keep your head above water. My research and bell curve show that after 10,000 trades less than 5% are profitable. After 20,000, less than 2%. I know this follows long held logic that only 5% of traders are profitable long term. The difference is that I am saying that how hard you work and your ability to read charts is not a major factor in where you will fall under that bell curve. You are playing a negative expectancy game. Until you can prove, with hard data over a large number of trials, that you can overcome that negative expectancy you are just hoping. Your short term profits are well accounted for under the bell curve and will eventually reverse.
  • #59
  • Aug 19, 2009 10:00am Aug 19, 2009 10:00am
Quoting FX-Petra
Several have asked me to try to further explain my thoughts. It is complicated, but I am a teacher by trade so I will give it a shot!

The absoulute minimum required to be profitable is a system (discresionary or robotic) that can overcome the spread and yeild +1 pip. That is it, period. Every thing after that simply displays how much equity you have in your account and how much "draw down" you can withstand. The mathmatical elements of any system are 1) risk-reward ratio and 2) win percentage 3) spread amount (or negative expectancy %). Consider...
That is of course if you trade in an 'open-ended' way.

If you are (as a profitable trader) armed with that knowledge of the Bell-Curve, you know when to jump off the train - namely when you have accumulated profits and when the profitability curve starts flattening. Nobody in the world would force you to carry on trading a model that is approaching its expiry date, i.e. you run into these huge inevitable sequence of losses.

Another factor to consider is (and I believe that goes for the small retail trader as well as for the well capitalized fund), a trend following approach. These can have as little as one trade every six month. Those models have usually a win/loss ratio that is stacked against the trader but a risk reward ratio that favourable enough to overcome this plus any costs (like spread and rollover) involved in that style of trading.

With correct money management and position sizing, you are not worried about the losing side because your positive expectancy is determined by the winning trades' high reward. You won't with this type of speculation get old enough to disprove your theory - since it would take you 5000 years to complete a sequence of 10000 trades, but old legends like Rogers or Buffett are a good example for the validity of these trading models.

regards
daytrading
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  • #60
  • Aug 19, 2009 10:03am Aug 19, 2009 10:03am
A major component of trading success is the mental aspect, well done on putting extreme doubt into peoples minds whilst offering no information of any value whatsoever.
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