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Long term Profits within Negative Expectancy

  • #81
  • Aug 19, 2009 1:14pm Aug 19, 2009 1:14pm
Quoting FX-Petra
All of my hope, experience, personal knowledge, and hard work does not add up to dog crap. Mathmatical certainy is as true in the forex market as it is in all nature and the universe.
Aren't you making the awfully big assumption that markets have something or other to do with mathematics besides merely being expressed in a mathematical form? And are you able to express human thought processes mathematically using present day mathematical capabilities?

I can understand mathematical statistics and card games or casinos, but mathematical statics and trading logs quite frequently have a problem seeing eye to eye.
  • #82
  • Aug 19, 2009 1:42pm Aug 19, 2009 1:42pm
Quoting angus
Aren't you making the awfully big assumption that markets have something or other to do with mathematics besides merely being expressed in a mathematical form? And are you able to express human thought processes mathematically using present day mathematical capabilities?

I can understand mathematical statistics and card games or casinos, but mathematical statics and trading logs quite frequently have a problem seeing eye to eye.
I will try again.......

When you enter a trade, there must be a reason. Some bit of news, one MA just crossed another MA, a fib line was hit, the baby started crying.... whatever. What emperical evidence do you have that the trade will go your way? Not your hope, instinct, prayers or guru, but solid emprical evidence. I submit, as a small retail trader, you have none. If anyone can show, for example sake, that after a move of 100 pips or more the 38.2% fib is a point where price will bounce on a consistent basis, then we are on to something. But price may bounce, or it may contine through the 38.2% fib. There is no staistically significant difference in what it will do, at least from the research I have conducted. So why should I enter the trade? It is a guess. It is a race in which I have spotted my opponent a 2 or 3 pip head start (trading E/U). What do I KNOW about the upcomming race that will allow me to overtake my opponent and take the lead? When we start to find the answer to that question, we are on our way to success. Otherwise, we are throwing darts at a board, a spinning board at that.
"I don't throw darts at a board, sport"---Gorden Gekko
  • #83
  • Aug 19, 2009 1:52pm Aug 19, 2009 1:52pm
Quoting FX-Petra
I will try again.......

When you enter a trade, there must be a reason. Some bit of news, one MA just crossed another MA, a fib line was hit, the baby started crying.... whatever. What emperical evidence do you have that the trade will go your way? Not your hope, instinct, prayers or guru, but solid emprical evidence. I submit, as a small retail trader, you have none. If anyone can show, for example sake, that after a move of 100 pips or more the 38.2% fib is a point where price will bounce on a consistent basis, then we are on to something....
I can't believe you're using words like 'evidence', 'will', and 'know' when talking about price direction!

How about using 'probability' and 'strategy' instead?
  • #84
  • Aug 19, 2009 1:54pm Aug 19, 2009 1:54pm
Quoting FX-Petra
Small retail forex traders are leveraged 100 times or more... sometimes 400.
Phrased like this, it's wrong. Some, maybe many, maybe even most, but certainly not all fx traders are leveraged 100 times.

I get a real kick out of the way so many speak with certainty on these forums when they are anything but.
  • #85
  • Aug 19, 2009 2:06pm Aug 19, 2009 2:06pm
Quoting FX-Petra
I will try again.......

When you enter a trade, there must be a reason. Some bit of news, one MA just crossed another MA, a fib line was hit, the baby started crying.... whatever. What emperical evidence do you have that the trade will go your way? Not your hope, instinct, prayers or guru, but solid emprical evidence. I submit, as a small retail trader, you have none. If anyone can show, for example sake, that after a move of 100 pips or more the 38.2% fib is a point where price will bounce on a consistent basis, then we are on to something. But...
All of that only really applies to a purely mechanical system. But there you go again sticking pure mathematics into a system that has not been proven to have much to do with mathematics. I'm not trying to annoy you here, but most traders that I know don't trade on an "empirical evidence" only basis.
  • #86
  • Aug 19, 2009 2:10pm Aug 19, 2009 2:10pm
Quoting pipmutt
I can't believe you're using words like 'evidence', 'will', and 'know' when talking about price direction!

How about using 'probability' and 'strategy' instead?
What I mean by the word "know" is that I have applied mathmatical rigor to the my reason for entering the trade and such rigor has given me a positive expectancy rather than a negative one.

For example: If I enter at the 38.2% fib (looking for a bounce), I know though testing there is a 55% probability that I will be correct.... given a 1:1 risk-reward ratio. That is a simple system that could yeild great results over the long term. Problem is, it is a fantasy. If anyone can point me in the direction of 55% win rate on a 1-1 r/r, I would appreciate it. I do not believe that it exits. I would love to be proven wrong. Maybe I could be like that Magican Randy who offered the reward for anyone who could prove supernatural powers. I think my money would be safe.
  • #87
  • Aug 19, 2009 2:18pm Aug 19, 2009 2:18pm
Quoting FX-Petra
For example: If I enter at the 38.2% fib (looking for a bounce), I know though testing there is a 55% probability that I will be correct.... given a 1:1 risk-reward ratio. That is a simple system that could yeild great results over the long term. Problem is, it is a fantasy. If anyone can point me in the direction of 55% win rate on a 1-1 r/r, I would appreciate it. I do not believe that it exits. I would love to be proven wrong. Maybe I could be like that Magican Randy who offered the reward for anyone who could prove supernatural powers....
Just out of curiosity, why would you want to use 1:1 risk reward ratio? Why not aim to 1:infinite risk to reward ratio?

IMHO systems with 1:1 are almost certain to fail. If you try to have an edge with entry, why not try to have an edge with exit too?
  • #88
  • Aug 19, 2009 2:20pm Aug 19, 2009 2:20pm
Quoting angus
All of that only really applies to a purely mechanical system. But there you go again sticking pure mathematics into a system that has not been proven to have much to do with mathematics. I'm not trying to annoy you here, but most traders that I know don't trade on an "empirical evidence" only basis.
I don't care if the reason you enter a trade is mechanical or not. Like I said maybe your signal is a baby crying, the color of the next candle... whatever. What do you have, other than your belief or hope, that the trade will go your way? What reason do you have that after 100 trades you will have more winners that loosers? Did someone tell you and you believe it? Does your past experience make you believe it? Did a guru on CNBC adivse it? Without mathmatical rigor it is a guess. OK, maybe a slightly educated guess....but is that education enough to overcome the head start you gave the market when you pushed that button and paid that spread?

I thank you for your posts and wish you all the best!
  • #89
  • Aug 19, 2009 2:25pm Aug 19, 2009 2:25pm
Quoting FX-Petra
I will try again.......

When you enter a trade, there must be a reason. Some bit of news, one MA just crossed another MA, a fib line was hit, the baby started crying.... whatever. What emperical evidence do you have that the trade will go your way? Not your hope, instinct, prayers or guru, but solid emprical evidence. I submit, as a small retail trader, you have none. If anyone can show, for example sake, that after a move of 100 pips or more the 38.2% fib is a point where price will bounce on a consistent basis, then we are on to something. But...
Petra,

A trader trades his belief about the market. A good trader check's out whether his/her beliefs hold up to scrutiny, i.e. tons of testing, forward or back in direction does not really matter. On that basis, probabilities are evaluated. Whether you do that process of discovery and elimination (nowadays) on a visual basis (candle sticks) or like me in the old days without charts gauging the noise level on the floor when a rush of buying or selling started is not really relevant either.

What does matter is that whatever you find, you have to believe in. Otherwise you will not be able to gauge the risk involved. We constantly risk our health and sometimes our lifes for lesser beliefs than trying to make money (I will exclude noble life-saving activities from this discussion). There is a risk driving a car, crossing the road, drinking, taking drugs, etc.

Of course you are right when you say that once we enter the market, we have no guarantees that the market will ultimately yield to us. You have no guarantee either when you step outside your house that you won't have an accident that could cost you your health or even your life.

Nevertheless you take that risk time and time again - because statistically and historically the risk is small enough to live with it.

I admit that the history in FX (or any market for that matter) is not as comprehensive as that of human kind, but it does not have to be. After all, you only risk money, hopefully money you can afford to risk.

In trading, I believe in two valid concepts:

1) markets are not static (for the short term)

2) markets trend (for the long term)

If either of the concepts hold true to my belief about them, I can make money from the probabilities while dealing with certainties on the risk side of the spectrum. The cost involved are like in any other business - you want to open a shop that sells tools, you've got to lay out some cash before you sell any (and that you sell any is only guaranteed by your belief that you will - you don't know before they are sold with a profit).

Finally, look at currency historical data. If you bought eur/usd in 2001, with the right amount of fixed risk, your belief in trending markets would have been confirmed.

I would like to applaud you for starting a thread with a controversial topic - in my view, those bring out the best and most revolutionary discoveries in people.

Further to this, I wish you the best of luck in your endeavours - wherever they may lead you.

regards
daytrading
Enter Signature
  • #90
  • Aug 19, 2009 2:29pm Aug 19, 2009 2:29pm
Quoting mikkom
Just out of curiosity, why would you want to use 1:1 risk reward ratio? Why not aim to 1:infinite risk to reward ratio?

This is a good article writte by one of the members of this forum
http://www.forexfactory.com/attachme...1&d=1208454213
1:1 ratio was just an simple example. You can slide the scale any way you want to. A 3:2 ratio would require a win% of >40% to be profitable. Changing the r/r and win% does NOTHING to answer the question of how you are going to win a contest starting 3 pips in the hole. What do you know, that the market does not at that precise moment, that convices you that price will move in a certain direction to the extent that those 3 pips will be recovered and you will surge ahead by at least 1 pip?
  • #91
  • Aug 19, 2009 2:33pm Aug 19, 2009 2:33pm
Quoting FX-Petra
1:1 ratio was just an simple example. You can slide the scale any way you want to. A 3:2 ratio would require a win% of >40% to be profitable. Changing the r/r and win% does NOTHING to answer the question of how you are going to win a contest starting 3 pips in the hole. What do you know, that the market does not at that precise moment, that convices you that price will move in a certain direction to the extent that those 3 pips will be recovered and you will surge ahead by at least 1 pip?
Sorry I edited my comment after you quoted it (I do it a lot uh), the real question is, why wouldn't you try to have an edge in exit too if you try to have an edge in entry?

IMHO it's impossible to know what your risk to reward ratio will be before the trade is closed, risk you will know but the reward is what it is.

edit again: I might have misuderstood you, do you talk about realized risk:reward ratio of a system?
  • #92
  • Aug 19, 2009 2:40pm Aug 19, 2009 2:40pm
daytrading,

Thanks for your post. I have enjoyed them all.

As to your thoughts about "belief" in your system:

-- Millions believed the earth was flat...they were wrong
-- Millions believed the earth was the center of the universe.. also wrong
-- Sheep believe their masters love and care for them-they get slaughtered

Belief in a thing does not make it valid. Nor does hope. Not even short term success. When you enter that order you are saying that you know something that the market does not. You are trying to exploit some percieved ineffciency in the market. Otherwise, the price would not be where it is when you enter the market. Maybe you can keep beating the market, day after day, just based on your observations and brain power. I hope you can. I hope you understand that the math is against you... but if you can do it that should make success all the more gratifying.
  • #93
  • Aug 19, 2009 2:53pm Aug 19, 2009 2:53pm
Quoting FX-Petra
daytrading,

Thanks for your post. I have enjoyed them all.

As to your thoughts about "belief" in your system:

-- Millions believed the earth was flat...they were wrong
-- Millions believed the earth was the center of the universe.. also wrong
-- Sheep believe their masters love and care for them-they get slaughtered

Belief in a thing does not make it valid. Nor does hope. Not even short term success. When you enter that order you are saying that you know something that the market does not. You are trying to exploit some percieved ineffciency...
hahaha, Petra -

good point - but knowing something without believing it is as useless as believing in the wrong.

Don't worry, I work on the basis of what I know and what I believe. I don't leave any of my trades to chance - I have discovered an inefficiency which I have been exploiting for a long time (decades) and which works tomorrow as good as today - and all because of risk control - which is effectively the only parameter a trader has control over.

Taking the risk here of repeating myself, keep searching and you will find.

Good fortune to you.

regards
daytrading
Enter Signature
  • #94
  • Edited 2:56pm Aug 19, 2009 2:54pm | Edited 2:56pm
Quoting FX-Petra
Belief in a thing does not make it valid. Nor does hope. Not even short term success. When you enter that order you are saying that you know something that the market does not.
Hi FX Petra,

I think you have misrepresented Daytrading here slightly. I think the know underlined above should be changed to 'expect', at which point the argument changes quite dramatically and we would begin discussing managed risk.

I may be completely wrong though and i hope i haven't stepped on DT's toes.

Dan
  • #95
  • Aug 19, 2009 3:40pm Aug 19, 2009 3:40pm
-- Millions believed the earth was flat...they were wrong
a common misconception - no-one actually thought the earth was flat, many knew the earth was curved

-- Millions believed the earth was the center of the universe.. also wrong
Also a common misconception proven by Ancient Greeks, Egyptians, Arabic mathematitions.. take your pick

-- Sheep believe their masters love and care for them-they get slaughtered
Sheep are just stupid animals and have no concept of attaching emotions that are used by self aware sentient beings

Come on folks get real… no one knows whats going to happen next… as retail traders we don’t create the moves and are simply looking to jump on the direction of the most money flow in a particularly direction…

sometimes we are right other times we are wrong… we don’t even have to be right more times than we are wrong in this game. Just right enough to make some money and if you do that is all that matters

1:1 R/R doesnt mean a higher prob. of failure it just means your reward is smaller... waht if that 1:1 trade has a 90% win rate rate... that a good strat in my book

In the short term we are trading sentiment... which group of traders has the most amount of money tipping the market one way or the other...
In the long term we are trading perceived value based on FA/economic output which guess what is based on the sentiment of one group of traders having a bigger pot of cash taking positions in the same direction

If your making money who cares how your doing it as long as your doing it over the long term... short term anyone can get lucky.
  • #96
  • Aug 19, 2009 4:03pm Aug 19, 2009 4:03pm
g
Quoting daytrading
hahaha, Petra -

good point - but knowing something without believing it is as useless as believing in the wrong.

Don't worry, I work on the basis of what I know and what I believe. I don't leave any of my trades to chance - I have discovered an inefficiency which I have been exploiting for a long time (decades) and which works tomorrow as good as today - and all because of risk control - which is effectively the only parameter a trader has control over.

Taking the risk here of repeating myself, keep searching and you will find.

Good fortune...
  • #97
  • Aug 19, 2009 4:04pm Aug 19, 2009 4:04pm
Quoting FX-Petra
I hope you understand that the math is against you...
Please stop associating maths with your posts.

Your argument is that no strategy is any better then flipping a coin with equal risk.reward. Then including the spread it's negative expectancy.

Nobody is arguing with the latter part which is the maths. People are disagreeing with the first point. This thread is all about whether there are profitable strategies you "believe" that there aren't any, others "believe" that there are. Looking at the amount of interest in the threads in the systems forum it would be suggested that there are profitable systems.

Will they work forever (the long term), probably not, because eventually these systems will be automated, perfected, and the inefficiency will go out of the market, but if your system adapts to changes in the market, why not?

Don't see the point in getting something to work forever anyway, entropy is going to make the endeavour pointless even if it could be done.
  • #98
  • Aug 19, 2009 4:38pm Aug 19, 2009 4:38pm
I guess it's safe to say that certainty in trading comes from the exit. No one can predict where price will be when you put on a trade. It's all 'probability'. Even taht changes. I don't think there's a single system with a contant percentage probability day in and day out. Some days you might have 80% probability other days it might be 30%. Market changes.

I think the edge is actually on how you exit your trades. That's it. It's how you react to the market. It's difference between losing a little vs losing the whole position (most people just let it hit s/l which i think not the best way to manage risk). Over time, if your winners are multiples of losers, then your ability to lose a little can push you towards your profitability.
  • #99
  • Aug 19, 2009 9:07pm Aug 19, 2009 9:07pm
I'll attempt to summarize what's been said thus far, from my own perspective.

In casino games (blackjack, craps, roulette, etc), the odds can be precisely calculated. Not so with trading, because there are too many underlying intangibles.

However, with every trading method, even the most discretionary one, performance metrics (win rate, ave win size, etc) can provide us with an expectancy measure (or edge, or profit factor, call it what you will), albeit within an appropriate confidence level based on the trade sample size. Any discretionary 'complexities' (e.g. scaling in/out, trailing a stoploss, etc) are inherently factored into these metrics.

There's a difference between 'zero sum' and 'zero expectancy'. Casino games are examples of zero sum games: for every dollar won by the house, the punter loses one dollar, and vice versa. However, while a punter can win fortuitously in the short term, casinos will always win eventually because the game rules are structured to give them positive expectancy, and the law of large numbers must ultimately prevail. Hence it's possible to attain positive expectancy in a zero sum game; in the case of the casino, the edge lasts indefinitely because it is both fixed and calculable.

Casinos illustrate how a small edge, high transaction volume, tiny bet size (maximum allowed bet vs capital reserves), and a rigorously 'disciplined' approach to each game, guarantees sizeable profits. Casinos further teach us that no MM method (bet sizing strategy) can ever give the punter an edge. Expectancy is determined solely by the game rules and payoff amounts.

The math principles are not in dispute here. However, opinion in this thread is apparently divided as to what extent the casino model can be applied to trading. Costs make trading is a negative sum game, which any edge must be large enough to overcome; otherwise the trader will inevitably lose in the long term. The questions, as I see them, are:

 

  1. Is it possible to gain positive expectancy (from one's entries/exits)?
  2. Is it possible to for such an edge to last a lifetime?
  3. If not, is it possible to determine statistically that an edge has become impotent, and substitute another one?

Here are my own thoughts, for whatever they're worth:

1. There are traders who have been successful, and with some consistency, across many years. Every profitable trader has an edge of some kind, whether he chooses to think of it in mathematical terms, or not.

2. Just because one trader has not been able to find an edge, does not automatically mean that it's impossible for another to do so. There are an infinite number of potential approaches, and one can only test so many during the course of a lifetime. From a logical standpoint, it's impossible to prove exhaustively that something is impossible, unless one has infinite knowledge.

3. If price movement was a completely random walk, then every method would have an expectancy of zero (actually negative, if we consider costs). However, given that price behaves more 'predictably' at certain times (e.g. around S/R, round numbers), and there are certain tactics (e.g. stop hunting) and agendas employed in a premeditated fashion, then potentially exploitable inefficiencies exist. Hence the question becomes whether this behavior is on-balance 'predictable' enough to allow a +EV entry/exit method to be devised. While keeping in mind that the trader has the power to be as selective as he wishes in choosing which setup patterns or conditions that he wants to trade.

4. It's not possible to prove that an edge will remain profitable indefinitely. Nobody knows for sure how the markets will behave X years from now (especially as fields like AI and automated systems continue to progress). However, common sense suggests that edges based on deep-seated market principles are more likely to be robust.

  • #100
  • Aug 19, 2009 11:28pm Aug 19, 2009 11:28pm
Quoting hilmy83
I guess it's safe to say that certainty in trading comes from the exit.....
I think that there are two opposing ways of looking at this.

#1. Since the market provides everybody with the same opportunities, my edge must come from something that I bring personally to the equation. Hence (like you say) because I have no control over how prices will move, any edge must come from the way that I react to the market (trade management or exit).

#2. Conversely, my reaction is restricted to whatever the market does (for example, I can't extract 21 pips from a 20 pip move). Therefore the edge comes down to my ability to exploit 'inefficiencies', occasions where the probabilities are skewed in may favor.

Rightly or wrongly, I favor #2, but that's probably because of my math-based perspective.
If the market was a random walk, then every exit strategy (no matter how I set my stop, scale out, move to breakeven, trail my stop, etc) would have an expectancy of zero. You can prove this by creating hypothetical 'price charts' with a random number generator. For an exit strategy to provide an edge, then, prices must trend (on balance) more often, and/or further, than they retrace to an arbitrary stop. Again, no matter how I react, the end result is also restricted by what price does.

Some traders may have found a edge from their exits, but James16 taught me that entries in themselves can provide a real edge. With J16, it's the candle shape and context (location relative to S/R, end of a run, etc) that provides the high probability setup. With BRV, it's the fact that one is using a S/R point as the springboard to take potentially high RR trades. Jacko trades with the trend. DIBS uses a breakout from an IB in the direction of the daily move. And so on. In each case, the entry puts the trader on the right side of a move more than 50% of the time, kick-starting the trade, and potentially providing a 1:1 RR TP/SL with an edge (which may be further improved upon by letting the market determine the exit as the trade unfolds). But if these methods were reduced to totally random entries, I suspect that much of their effectiveness would be lost.
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