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Long term Profits within Negative Expectancy

  • #141
  • Aug 21, 2009 11:04am Aug 21, 2009 11:04am
Quoting FX-Petra
You seem very intelligent. If you indeed have proof that the market is not random, then step forward and claim your prize. The riches of this world are there for your taking. Rock star fame awaits you as you have cracked the code that 1000's of mathmeticians and scientist have struggled over for years. If you cannot write a proof explaining your postulate, then you are just stating what you believe to be true which, while entertaining and enjoyable, has no basis in fact from a sientific viewpoint.

Kindest Regards
Did you read the studies I referred you to? If there is even one strategy or trader that is profitable in the long run then the market is not random. That does not equate to mean that the market can be formulated with an equation that maps out the exact path or price at any given time, which you seem to be referring to. I think most people accept that and nobody who is arguing that the market is not perfectly random is claiming that such a magic equation exists.

For an example, have you ever researched gaps? Obviously in FX we only get one gap a week, but sure as buttons, it gets filled almost all the time. Perhaps not straight away and occasionally not for a long time but enough for it to be statistically significant. If you accept that this is true then there is a force that you cannot deny is pushing the market to fill that gap at some point in time then you must also accept that the market is not random. You can point out a couple of occasions when gaps haven't been filled but it is the exception that proves the rule, and also why it is imperative to use good money management.
  • #142
  • Edited 11:19am Aug 21, 2009 11:08am | Edited 11:19am
Quoting birdt
What do you make of this FX-Petra?

http://www.trading-naked.com/library...20Analysis.pdf

Within the discussion there is also mention of another paper geared toward the FX market (Chang and Osler 1994) which you may wish to investigate if you're of a mind to.

So based on this evidence alone, this suggests to me that 1. markets are not random. 2. Patterns repeatedly occur which provide information and insight into...
I do trade the equity markets. What I am talking about is Day Trading the spot Forex retail market. When I say day trading, then by necessity all positions must be closed and not carried overnight. If you do carry overnight postions, you are not a day trader. Yes, there are some edges to be found if you are a LONG term trader---easy ones. For example, the USD will weaken at some point. If I have the patience and margin to wait it out, I will be rewarded. How long will it take for E/U to top 1.60? Maybe a month, maybe a year, maybe 10 years. The route that it takes to get there will probably be filled with crazy moves and volitility that must be withstood. But from a Fundamental standpoint there is tremendous probability that we will, at some point, see new highs. That scenario has nothing to do with a day trader who opens and closes multiple positions every day. That person is playing a negative expectancy game. Most posters here have agreed that day trading is negative expectancy, but feel they have a system that can overcome it. I say they are playing a game that will, as a matter of mathmatical certainty, crush all but 5% of the players by the time they reach 10,000 trades. No one here has even attempted to refute that....but that is not unexpected. Most are offended by mathmatics and its simple elegance when it yields a result that they that does not match up with their beliefs. If this thread gives a few traders a reason to do some more research on their system before they push that button, then I am happy. On balance, I am helping them keep some of their money.
  • #143
  • Edited 12:42pm Aug 21, 2009 11:26am | Edited 12:42pm
Quoting FX-Petra
I do trade the equity markets. What I am talking about is Day Trading the spot Forex retail market. When I say day trading, then by necessity all positions must be closed and not carried overnight. If you do carry overnight postions, you are not a day trader. Yes, there are some edges to be found if you are a LONG term trader---easy ones. For example, the USD will weaken at some point. If I have the patience and margin to wait it out, I will be rewarded. How long will it take for E/U to top 1.60? Maybe a month, maybe a year, maybe 10 years....
Hi Petra,

In the spirit of this thread, I will attempt to refute at least part of your 10000 trade theory (whether I can refute that I belong to the 5% category, I don't know since I have no way of measuring the amount of people either failing or succeeding. This is a process in constant fluctuation).

One of the models I have developed (I think I have mentioned part of the stats before in this thread), is on the way to qualify for your 'test of time and numbers'.

The parameters are:

5 trades per day (no overnight holding) times 260 trading days per annum on avg = 1300 trades per year on average.

So far, 5,5 years of data (manually tested) with 7150 trades and an average return of +26.4% (largest real equity drawdown of -7.5%).

I am having a back-test code written as we speak - will probably take a couple of weeks, but then I will have 10 years of data or approx 13000 trades.

Should the data prove positive, I hope your faith in systematic trading will be restored.

regards
daytrading

P.S. I forgot to say: the model is 100% mechanical (no room for discretion)
Enter Signature
  • #144
  • Edited 12:55pm Aug 21, 2009 12:00pm | Edited 12:55pm
Quoting birdt
Did you read the studies I referred you to? If there is even one strategy or trader that is profitable in the long run then the market is not random. That does not equate to mean that the market can be formulated with an equation that maps out the exact path or price at any given time, which you seem to be referring to. I think most people accept that and nobody who is arguing that the market is not perfectly random is claiming that such a magic equation exists.

For an example, have you ever researched gaps? Obviously in FX we only get one gap...
Just because there is one profitable trader does not, in any way, prove the market is non-random. I have tried to explain that there is a bell curve using string theory that nicely accounts for a small number of profitable traders. I understand that it is hard for those traders to accept that they have benefited from good fortune under the bell curve and that they are not smarter than all the other dumb sots who just could not cut it. I realize that many will never accept this, because it does not jive with what they believe. It does not jive with their short term success. They will never accept it because they do not want it to be true. We humans are prone to this weakness. Many swear on a stack they have seen bigfoot. I do not think most are lying, just mistaken. They want to believe what their experience has told them. But there is no BigFoot. Likewise many traders think they can go on, day after day, year after year, making a living day trading spot forex...a negative expectancy game. They want to believe what their short term experience has told them--- that their success can continue without a mathmatical edge. I do not think they are lying to themselves, just mistaken about the mathematical Mt. Everest they are trying to climb. I write for those who are willing to entertain the idea that they could have been led down a dangerous path and swallowed false assumptions and cliche's hook, line, and sinker. I realize that will not be many.
  • #145
  • Edited 12:24pm Aug 21, 2009 12:08pm | Edited 12:24pm
Quoting FX-Petra
You seem very intelligent. If you indeed have proof that the market is not random, then step forward and claim your prize. The riches of this world are there for your taking. Rock star fame awaits you as you have cracked the code that 1000's of mathmeticians and scientist have struggled over for years. If you cannot write a proof explaining your postulate, then you are just stating what you believe to be true which, while entertaining and enjoyable, has no basis in fact from a sientific viewpoint.
You might be a bit behind the recent developments about random walk. Have you ever heard of work done by [profs] Lo & MacKinlay [80's]?

http://press.princeton.edu/titles/6558.html

Full text is available here

http://press.princeton.edu/books/lo/

I also included a 20 year combined backtest curve for eurusd (over 17000 trades) of my algos (it's not 100% modeling quality, not even close I know) with fixed risk [= no compounding]. The curve looks very much like this on all pairs I trade without any changes to algos.
Attached Image (click to enlarge)
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  • #146
  • Aug 21, 2009 12:30pm Aug 21, 2009 12:30pm
For one method I use, I normally place about an average of one trade per day, about half the time they are closed within the day, the rest of the time they are left to run, sometimes for one, occasionally for two days. I know it makes money. Its payoff ratio is sufficently high that as a trading method it is pretty robust. At the moment, I have about 1000 live trades with this particular method. It would take me about another 40 years to get to the 10000 trades and "prove" that it is possible to make money in the market. From a mathematical standpoint though, ill take 1000 trades as a representative sample.

When I say robust this is what I mean.

Lets say you have a %5 error margin in your measurement of the profitability of your system. At a given percentage hit rate, with a low risk reward ratio, there may be an edge present, but it may be too fine to exploit properly, and because of the lack of certainty in your measurements, it may not even exist at all. With a higher risk reward ratio, your expectation will be much greater, and hence that 5% error margin may be accurate enough to give you much more confidence that an edge exists and is exploitable. Most daytrading systems, do not attempt to aim for the higher risk reward opportunites that present themselves week to week, and therin lies your answer.
  • #147
  • Aug 21, 2009 12:35pm Aug 21, 2009 12:35pm
Quoting mikkom
You might be a bit behind the recent developments about random walk. Have you ever heard of work done by Lo & MacKinlay [80's]?

http://press.princeton.edu/books/lo/

True, the market is not random. There is a pattern to whatever is happening. Otherwise it is not possible for the market makers to engineer the market through systems.

Most of the patterns are well know. Data releases are regularly used as trigger points to create panic, fear and euphoria. Yet we are so conditioned to accept market (media - analysts bytes) noise and refuse to believe our own power of observation and instincts.

We are capable of writing software and building super computers and we choose to remain in awe of them.

PJ
  • #148
  • Aug 21, 2009 12:47pm Aug 21, 2009 12:47pm
Quoting The Fool
A flaw in your logic is the assumption that the movement of price in a given forex pair is "random"; nothing could be further from the truth. There are patterns and tendencies of price movement resulting from recurring conditions in the fundamental data set that drives price, and these can be reliably exploited, perhaps predicted, and traded profitably.

Also, you seem to suggest (above) that an adjustment of "win rate" necessarily is accompanied by a corresponding adjustment in the ratio of profit/loss risked. I see that as a non-sequitur....
Hi The Fool:

If what you said was accurate then more traders would be exploiting recurring conditions. The fact is the market is random but at times it appears to be otherwise. Don't be fooled by randomness and don't let the rat beat you.
If you only trade long, then you can't always be wrong.
  • #149
  • Aug 21, 2009 12:52pm Aug 21, 2009 12:52pm
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...
And like moths to the flame, traders are attracted to the belief the market is not random.
If you only trade long, then you can't always be wrong.
  • #150
  • Aug 21, 2009 12:59pm Aug 21, 2009 12:59pm
Quoting Hotch
...
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.
...
"There's a sucker born every minute"

It is generally taken to mean that there are (and always will be) a lot of gullible people in the world.

The amount of interest shown by people has nothing to do with the fact or truth of the matter.
If you only trade long, then you can't always be wrong.
  • #151
  • Aug 21, 2009 12:59pm Aug 21, 2009 12:59pm
I wonder if there's a mathematical way to present an exercise in futility.

You're preaching to people who have first hand practical experience of the longevity of trading spot forex. The one's who haven't will try regardless of any scaremongering so what was the point?

This reminds me of one of those "End of the world is near" placard guys, for everyone else it's business as usual.....when it's over it's over but we may as well enjoy it while it lasts
  • #152
  • Aug 21, 2009 1:03pm Aug 21, 2009 1:03pm
Quoting ThePipDoctor
Expectancy has nothing to do with the spread and the fact you are down x pips when you open a trade. It has everything to do with how you approach the market.
However, the spread does have something to do with expectancy because you have to subtract the spread from your winners and add the spread to your losers when you calculate the expectancy.
If you only trade long, then you can't always be wrong.
  • #153
  • Aug 21, 2009 1:05pm Aug 21, 2009 1:05pm
Quoting daytrading
Petra,

The reason is very simple: because the market is NOT random.

regards
daytrading
If this were true then why don't most money managers beat the index?

Surely with all the resources at their disposal, they would be in the best position to know exactly what the market is going to do.
If you only trade long, then you can't always be wrong.
  • #154
  • Aug 21, 2009 1:09pm Aug 21, 2009 1:09pm
Quoting FX-Petra
...You must be able to accurately predict market direction correctly in a staistically significant way....
That is part of the myth. The reasons systems break down and fail is because they try to predict market direction rather than "go with the flow".

My signature gives you a clue to what it takes to let the market and its randomness work for you.
If you only trade long, then you can't always be wrong.
  • #155
  • Aug 21, 2009 1:09pm Aug 21, 2009 1:09pm
Quoting FrankenPip
"There's a sucker born every minute"

It is generally taken to mean that there are (and always will be) a lot of gullible people in the world.

The amount of interest shown by people has nothing to do with the fact or truth of the matter.
Frankenpip,

Why don't you disprove the following for the readers:

The Nonrandom Market

For the most part, commodity prices are like a drunken sailor, wandering down the street without any knowledge of where he is going, or where he has been. Mathematicians would say there is no correlation between past price activity and future trends.
About that, they would be wrong: there is some correlation. Although that drunken sailor does swagger, stagger, and seemingly move in a random fashion, there is method to his madness. He is trying to go someplace, and we can usually find out where.
While price action involves a large degree of randomness, it is far from a totally random game. If I cannot prove that point, right now, early on in this book, the remaining chapters should be devoted to
learning how to throw darts. In a random game, the dart thrower will outperform the experts.
Start with a given - if we flip a coin 100 times, it will come up heads 50 times and tails 50 times. Each time it comes up heads, on the next flip we will have 50 percent heads and 50 percent tails. If heads has now
appeared two times in a row and we flip again, the results continue to be 50/50 that a head will appear on the next flip. As you have probably heard, the coin, dice, or roulette wheel has no memory. The odds are fixed, as this is a random game.
If that were true of the market and prices close higher 50 percent of the time, then after each up close we would expect to see another up close 50 percent of the time, and following that up close again 50 percent
odds of another up close. The same thing should apply to a down close: 50 percent of the time following one down close, we should see a repeat; and again 50 percent of the time following two in a row, a third down
close should appear. In our real world of trading, it does not turn out that way, which can only mean price action is not totally random!

I am not copying the associated tables purely for the reason of not cluttering up the thread, but Larry Williams (who wrote the book from which this excerpt originates), has tested extensively for non-randomness. Like myself he has been in the business of making money from a non-random market for many decades, which should tell us a few things.

regards
daytrading
Enter Signature
  • #156
  • Aug 21, 2009 1:14pm Aug 21, 2009 1:14pm
Quoting FX-Petra
You seem very intelligent. If you indeed have proof that the market is not random, then step forward and claim your prize. The riches of this world are there for your taking. Rock star fame awaits you as you have cracked the code that 1000's of mathmeticians and scientist have struggled over for years. If you cannot write a proof explaining your postulate, then you are just stating what you believe to be true which, while entertaining and enjoyable, has no basis in fact from a sientific viewpoint.

Kindest Regards
You can not prove a negative. You can not prove that there are no "black swans". You can only prove that there are "black swans".

Random is a term used in mathematics, as well as in a more general use, for situations when there is no way to know the outcome (what will happen).

Can you prove that you know the outcome of every tick? If you can't, then the market is random.
If you only trade long, then you can't always be wrong.
  • #157
  • Aug 21, 2009 1:17pm Aug 21, 2009 1:17pm
Quoting daytrading
Frankenpip,

Why don't you disprove the following for the readers:

The Nonrandom Market

[font=TimesNewRoman][left]For the most part, commodity prices are like a drunken sailor, wandering down the street without any knowledge of where he is going, or where he has been. Mathematicians would say there is no correlation between past price activity and future trends.
About that, they would be wrong: there is some correlation. Although that drunken sailor...

HI daytrading:

The analogy is flawed.

Have you read "FOOLED BY RANDOMNESS"? The proof you seek is in that text.
If you only trade long, then you can't always be wrong.
  • #158
  • Aug 21, 2009 1:20pm Aug 21, 2009 1:20pm
Here is another little bit after testing for randomness in the market:



Table 1.1

shows the percentage of time that prices closed higher in a wide variety of markets. There
were no criteria; the computer just bought on the open each day and exited on the close. Instead of having a
50/50 result we have a slight skewing in that 53.2 percent of the time price closed higher than the opening.
This shouldn't be.
Well, if this "shouldn't be," how about buying on the opening following a down close? In theory, we
should see the same percent of up closes shown in Table 1. 1. The problem is (for college professors and
other academics who are long on theory and short on market knowledge) that it does not turn out this way.


Table 1.2

shows the number of times price closed higher following a number of down closes.
This is not earth-shaking news to a trader; we know market declines set up rallies. The exact
percentages were not known in the past, and I would never use these tables to take or stay in a trade. That is
not the point: the point is we should have seen an average up close of 53.2 percent following the one minus
close as well as two consecutive minus closes. The fact we did not suggests the market is not random;


patterns do "predict" and now we can proceed, sans darts.

I rest my case for a non-random market and against efficient market hypothesis.

regards
daytrading
Enter Signature
  • #159
  • Aug 21, 2009 1:21pm Aug 21, 2009 1:21pm
Quoting daytrading
Frankenpip,

Why don't you disprove the following for the readers:

The Nonrandom Market


[left]For the most part, commodity prices are like a drunken sailor, wandering down the street without any knowledge of where he is going, or where he has been. Mathematicians would say there is no correlation between past price activity and future trends.
[font=TimesNewRoman]About that, they would be wrong: there is some...
There are so many errors in that paper, I am not going to even start in on it. Copy and paste it on any math board and even amatuer mathmeticians will rip it to shreads. I'm not saying you are wrong, daytrading. I want you to be right. I want to retire from teaching in a few years and supplement my income by trading forex.... but find another author to quote. Mr. Williams would flunk any sophmore undergrad stats class.
  • #160
  • Aug 21, 2009 1:21pm Aug 21, 2009 1:21pm
Quoting daytrading
Here is another little bit after testing for randomness in the market:



Table 1.1

[left]shows the percentage of time that prices closed higher in a wide variety of markets. There
were no criteria; the computer just bought on the open each day and exited on the close. Instead of having a
50/50 result we have a slight skewing in that 53.2 percent of the time price closed higher than the opening.
This shouldn't be.
Well, if this "[font=TimesNewRoman]shouldn't...
HI daytrading:

Please provide your definition of randomness because I do not think we are in agreement.
If you only trade long, then you can't always be wrong.
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