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Long term Profits within Negative Expectancy

  • #101
  • Aug 20, 2009 2:52am Aug 20, 2009 2:52am
Quoting hanover
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.

I guess what I'm having trouble understanding is why anyone would need to know those stats, especially when the numbers can change according to market dynamics. A system with a great expectancy measure today could be turned on its head tomorrow, you've only got to look at the past 12 months to see a perfect example of how markets can change.

Despite all the number crunching and theory presented by people like the OP the reality of it is there are consistently profitable traders trading this market every day and making money, some of them have been doing it for years, it's hard to overlook practical results in favor of theoretical supposition.

Isn't the only real and relevant metric bottom line P&L, it's an indisputable number based on reality.
  • #102
  • Aug 20, 2009 3:24am Aug 20, 2009 3:24am
Quoting pipmutt
I guess what I'm having trouble understanding is why anyone would need to know those stats, especially when the numbers can change according to market dynamics. A system with a great expectancy measure today could be turned on its head tomorrow, you've only got to look at the past 12 months to see a perfect example of how markets can change.

Despite all the number crunching and theory presented by people like the OP the reality of it is there are consistently profitable traders trading this market every day and making money, some of them have...
Pipmutt,

Yes, you last sentence is very true - but as a trader (especially a new one) you would want to know (or at least attempt to find out) whether your P&L (assuming positive) has its roots purely in chance (i.e. in a series of 1000 throws of a coin - or trades), there is a possibility that heads (e.g.winning) comes up 83 times in a row before 'luck' turns to 95 times tales (losing) in a row - which is well possible.

If you (even as a discretionary trader) come across a time when losses prevail for longer than before in your own trading history, it is a normal reaction to doubt your ability or at least wonder whether 'your luck has run out'.

However, if you on a statistical basis can rely on the knowledge that a series of losses can occur in your chosen trading without damaging the overall P&L in the long run, you can carry on taking your trade signals with peace of mind - otherwise a very common trait in traders appears, namely that of discarding a method (or system or whatever you choose to call it) after a losing streak....and the consequences of that put the average trader in the losers camp.

regards
daytrading
Enter Signature
  • #103
  • Aug 20, 2009 4:08am Aug 20, 2009 4:08am
Quoting hilmy83
I guess it's safe to say that ........(most people just let it hit s/l which i think not the best way to manage risk). .
I do, as a key feature of my strategy and for very good reasons.
The Thief of Wall Street
  • #104
  • Edited 4:33am Aug 20, 2009 4:16am | Edited 4:33am
Quoting daytrading
If you (even as a discretionary trader) come across a time when losses prevail for longer than before in your own trading history, it is a normal reaction to doubt your ability or at least wonder whether 'your luck has run out'.

However, if you on a statistical basis can rely on the knowledge that a series of losses can occur in your chosen trading without damaging the overall P&L in the long run, you can carry on taking your trade signals with peace of mind - otherwise a very common trait in traders appears, namely that of discarding...

Points taken, actually thinking more about this I think it's difficult for me as a predominantly discretionary trader to fully appreciate that other traders are obviously successfully using purely mechanical systems able to be quantified, these stats are important to them.

I'm getting a distinct feeling of inadequacy now, I respect the market but maybe I've got complacent and should be doing more with analyzing my results, I just can't see the benefit in it for me. If I get a couple of losing trades in a row (for anything other then 'trader error' ie my fault!) I'll usually sit out a couple of trades and see if they would have worked out on paper. Not very scientific I know, but realistic nevertheless. Bottom line P&L is the ultimate indicator for me, it's the only thing I can take to the bank!

I see what you're saying though and it makes sense as usual
  • #105
  • Aug 20, 2009 4:36am Aug 20, 2009 4:36am
Quoting pipmutt
Points taken, actually thinking more about this I think it's difficult for me as a predominately discretionary trader to fully appreciate that other traders are obviously successfully using purely mechanical systems able to be quantified, these stats are important to them.

I'm getting a distinct feeling of inadequacy now, I respect the market but maybe I've got complacent and should be doing more with analyzing my results, I just can't see the benefit in it for me. If I get a couple of losing trades in a row (for anything other then 'trader error'...
Thank you.

Look at it this way: a discretionary trader (assuming again, a profitable one) is nothing but a 'system' in itself - for the purpose of qualification and quantification, most likely a much more complicated one than a mechanical trading model based upon a few simple rules only.

It would take such a person much greater effort to explain the precise decision making process behind taking one of his very subjectively based trading signals, which to him/her makes perfect sense.

The quantitative measure of statistical viability comes simply from taking this traders past history of trades, counting them (on a daily, monthly, annual) basis and establish whether over those frequencies the P&L ends up positive.

Where is becomes difficult is when trying to transfer that type of 'system' to another person for example. Since the mechanics of it might be in all likelihood very closely attached to that specific person, it becomes impossible to copy and repeat the processes involved in creating the same positive P&L.

Although this has nothing to do with your ability to produce profits per-se, it is the sole reason why 99% of the models shown for example in the trading systems section are a waste of time for any reader (in fact, I have yet to find one with uncompromised 100% mechanical attributes).

Sorry, I ventured off topic slightly.

regards
daytrading
Enter Signature
  • #106
  • Aug 20, 2009 6:29am Aug 20, 2009 6:29am
Quoting daytrading
The quantitative measure of statistical viability comes simply from taking this traders past history of trades, counting them (on a daily, monthly, annual) basis and establish whether over those frequencies the P&L ends up positive.

Isn't that just (a complicated version of) an equity curve?
  • #107
  • Aug 20, 2009 6:58am Aug 20, 2009 6:58am
Quoting pipmutt
Isn't that just (a complicated version of) an equity curve?

hahaha..., yes, if you wish.
Enter Signature
  • #108
  • Aug 20, 2009 8:34am Aug 20, 2009 8:34am
Quoting Hotch
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...
Hotch,
Yes, there are inefficeincies in the market that can be exploited. The question is, can I as a small retail trader exploit them. Of the opportunities I have found, I cannot. The real question that I am asking is, "When you decide to take a trade, what has happened that has caused you to make that decision?" Any time you place a trade, you are making a prediction about what will happen in the future. The market believes the price should be where it is.... and you either believe that market is wrong and must correct or believe some future event will occur to make price move in the direction of your trade. Either way, it is very damn difficult to corner the market's sentiment or predict the future. My "belief" has absoultley no affect on the market... it is going where it is going. What we need is a set of predictible, repeatable market conditions to occur and price reaction to those conditions to react in a statistically significant non-random way. If we find that set of circumstances, we can consistently make money. We will not win every trade, but we will win more than we lose. Absent those conditions, we are guessing.
  • #109
  • Aug 20, 2009 8:42am Aug 20, 2009 8:42am
Quoting FX-Petra
Hotch,
Yes, there are inefficeincies in the market that can be exploited. The question is, can I as a small retail trader exploit them. Of the opportunities I have found, I cannot. The real question that I am asking is, "When you decide to take a trade, what has happened that has caused you to make that decision?" Any time you place a trade, you are making a prediction about what will happen in the future. The market believes the price should be where it is.... and you either believe that market is wrong and must correct or believe some future...
Petra,

what type of trades (or conditions for a trade) did you experiment with?

very often the solution lies outside the box, so to speak - but when eventually discovered, the simplicity of it knocks one over.

regards,
daytrading
Enter Signature
  • #110
  • Aug 20, 2009 9:19am Aug 20, 2009 9:19am
Quoting daytrading
Petra,

what type of trades (or conditions for a trade) did you experiment with?

very often the solution lies outside the box, so to speak - but when eventually discovered, the simplicity of it knocks one over.

regards,
daytrading
Well, I will try to sum up what I have discoverd so far:

1) I cannot predict the future with any greater accuracy than a coin flip.
2) Price does not react to any particular point on the graph in a statistically significant way-- but I am still looking "00" numbers...it has shown some promise.
3) The only potentially exploitable statistically significant inefficency I have found is this--- "Stop hunts occur, and they occur quite frequently".

I am trying to develop a winning system based on stop hunting. I have tested 3 so far but nothing yet to take to the bank. Maybe I should start a thread about building a stop hunting system and get some ideas!
  • #111
  • Aug 20, 2009 9:34am Aug 20, 2009 9:34am
Quoting FX-Petra
Well, I will try to sum up what I have discoverd so far:

1) I cannot predict the future with any greater accuracy than a coin flip.
2) Price does not react to any particular point on the graph in a statistically significant way--
Oh come on, seriously! Hardly extensive research is it!

Draw a trendline, draw a channel, look at retracements, confluence, price action.....crikey draw anything, there are literally thousands of possibilities!

I get exasperated when I read this kind of weak limp-wristed approach, I bet you feel the same way about some of your students sometimes!

Stop-hunting strategy? Great, go for it! Start the thread (actually I think there are a couple already but I'm sure a new one wouldn't hurt), I'll post a link to one of Boris Schlossberg's ideas on the subject, I'm sure some heads will join in, let's develop a strategy!

This is betting on a 2-horse race, it's not rocket science!

We'll make a convert out of you yet
  • #112
  • Aug 20, 2009 9:43am Aug 20, 2009 9:43am
Quoting FX-Petra
Well, I will try to sum up what I have discoverd so far:

1) I cannot predict the future with any greater accuracy than a coin flip.
2) Price does not react to any particular point on the graph in a statistically significant way-- but I am still looking "00" numbers...it has shown some promise.
3) The only potentially exploitable statistically significant inefficency I have found is this--- "Stop hunts occur, and they occur quite frequently".

I am trying to develop a winning system based on stop hunting. I have tested 3 so far but nothing...
Ok, thank you for your openess.

Answer to 1: that is correct - but there is no need to.

Answer to 2: that is correct too - fibo-hits for example occur as often as they don't in the long run, so a no-go as well (as are most indicator based occurrences).

Answer to 3: stop-hunts as they might be referred to happen as often intentionally as they happen coincidentally because of position taking that has its root in either hedges, position liqiuidation or large option related volatility.

Real inefficiencies are based on volatility breakouts, price behaviour relative to market open (in fx cash an artificial value, except sunday), and price behaviour relative to most recent high's and lows.

One other universally applicable truth about any tradable market is that large ranges (or large ranging days) are preceeded by small ranges (or small ranging days) and vice versa. That means its an occurrence you can bank on - over and over again. How you transform that into your rules (which is an indispensable process) is up to you, of course.

Daily volatility can be measured by calculating the difference between the day's high and the close. If that value increases out of recent proportion, trend changes are happening.

regards
daytrading
Enter Signature
  • #113
  • Aug 20, 2009 10:49am Aug 20, 2009 10:49am
Hi, DT

Quote
Real inefficiencies are based on volatility breakouts, price behaviour relative to market open (in fx cash an artificial value, except sunday),
It seems that Joel Rensink share the same perspective with you, although his focus is on the long timeframe.

Quote
price behaviour relative to most recent high's and lows.
Do you mean price action here?


p.s:If anyone interested in what DT mentioned Volatility-Breakout strategy, could might check Toby Crabel's work.
  • #114
  • Aug 20, 2009 10:55am Aug 20, 2009 10:55am
Quoting Zkf
Hi, DT


It seems that Joel Rensink share the same perspective with you, although his focus is on the long timeframe.


Do you mean price action here?


p.s:If anyone interested in what DT mentioned Volatility-Breakout strategy, could might check Toby Crabel's work.
Hi Zkf,

I know Rensink's work. I am more referring to Larry Williams work though - which I am sure came first.

Price action, yes, but on daily charts rather than intraday charts.

And yes, I read Crables work - which is part of the foundation of my own work - although not for public consumption.

regards
daytrading
Enter Signature
  • #115
  • Aug 20, 2009 12:32pm Aug 20, 2009 12:32pm
This thread is turning into one of the best on FF. Daytrading, of all the inefficiencies you capitalise on, do you choose the single most profitable or diversify your strategies? Is diversifying more profitable in the long run, or does it smooth out equity curves?
Presumably the best portfolio of strategies would be one that focuses on different unconnected (in as far as that is possible) inneficiencies?
If you do have a portfolio, do you simply run them all in tandem and net trade your position, or do you handle them completely independently? So many questions, hope you don't mind
  • #116
  • Aug 20, 2009 1:05pm Aug 20, 2009 1:05pm
Quoting triphop
This thread is turning into one of the best on FF. Daytrading, of all the inefficiencies you capitalise on, do you choose the single most profitable or diversify your strategies? Is diversifying more profitable in the long run, or does it smooth out equity curves?
Presumably the best portfolio of strategies would be one that focuses on different unconnected (in as far as that is possible) inneficiencies?
If you do have a portfolio, do you simply run them all in tandem and net trade your position, or do you handle them completely independently?...
Ok,

Modern portfolio theory describes the best results are coming from diversification of higher risk uncorrelated strategies rather than lower risk strategies with closer correlation.

The problem is there are correlations even across different asset classes and (following the thin red line of the thread topic), it is a comprehensive mathematical and statistical exercise to mix the best suited models together in a portfolio to achieve the best risk adjusted returns without a (as you mentioned) too bumpy equity curve.

Another important aspect is (sorry for branching away from the thread topic again) the size in terms of equity under management in the fund business. If you are a single trader (like probably most in here), you don't come across liquidity problems that force you to abandon 'inefficiencies' which only exist for small(er) position sizes.

An example would be the fact that your entry and exit are reliant on precise price execution (your target is 5 pips [5+spread]) and that will become a problem if you want to execute $500m. Although FX cash is the most liquid instrument in the financial market - and the most tightly priced one - you will not get an execution guarantee for a 1 pip spread in eur/usd above a certain amount. This is what funds look at in trading models; its called scalability, i.e. is your system performing even if you try and trade it for institutional amounts.

Most funds (and CTA's) run several strategies 'in tandem' as you identified with variations like 'relative value' strategies, trend-following strategies, statistical arbitrage and more. Usually and under current regulations, most have to 'mark-to-market' their posrtfolios at the end of the day (via computer generated values) that measure the net P&L at a given point (simplified version).

A single trader has only limited capacity to actively run different trading models at one time - unless they are automated, which in turn means less room for discretion.

regards
daytrading
Enter Signature
  • #117
  • Aug 20, 2009 1:34pm Aug 20, 2009 1:34pm
Liquidity problems - which is why when FXCM were looking for non-discretionary strategies with a good track record for their investment funds, they wouldn't accept any news strats because of the problems of scaling them up I presume.

Interesting DT, thanks again. Back to the floor...
  • #118
  • Aug 20, 2009 2:10pm Aug 20, 2009 2:10pm
Quoting daytrading
Another important aspect is (sorry for branching away from the thread topic again) the size in terms of equity under management in the fund business. If you are a single trader (like probably most in here), you don't come across liquidity problems that force you to abandon 'inefficiencies' which only exist for small(er) position sizes.

I guess that contributes to the reasons why some funds struggle to produce even double digit returns while the average intraday trader can often produce triple digit on a reasonably sized account.

It makes you wonder how some of these large funds manage to exit positions without adversely affecting price too much, it must take months! Boy we have it easy, one click and we're flat!

DT, were you or are you in the business?


Just to keep it on topic, I bet they use a quantitative measure of statistical viability!
  • #119
  • Aug 20, 2009 2:54pm Aug 20, 2009 2:54pm
Quoting pipmutt
I guess that contributes to the reasons why some funds struggle to produce even double digit returns while the average intraday trader can often produce triple digit on a reasonably sized account.

It makes you wonder how some of these large funds manage to exit positions without adversely affecting price too much, it must take months! Boy we have it easy, one click and we're flat!

DT, were you or are you in the business?


Just to keep it on topic, I bet they use a quantitative measure of statistical viability!
Pip,

Most of the time liquidity problems can become a real bummer when multiple (and I mean a truck load) of institutions ride the same strategy, i.e. when a great chunk of market participants started to unwind the carry trades a while ago. That has serious consequenses to the whole market.

If it is just one fund trying to get out of a position, it will cost them pips of course - but it won't effect the end result too heavy since these occurrences are factored in as 'costs'.

I am in the business, yes.

regards,
daytrading
Enter Signature
  • #120
  • Aug 20, 2009 3:07pm Aug 20, 2009 3:07pm
Quoting daytrading
Answer to 3: stop-hunts as they might be referred to happen as often intentionally as they happen coincidentally because of position taking that has its root in either hedges, position liqiuidation or large option related volatility.

Real inefficiencies are based on volatility breakouts, price behaviour relative to market open (in fx cash an artificial value, except sunday), and price behaviour relative to most recent high's and lows.
Clusters of stops are a very important (at least for me) inefficiency that can be exploited, I'm not sure about the actual hunts. They are also one of the reasons of the high/low price action and volatility changes daytrading mentioned.

I agree with the rest of the post.
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