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Long term Profits within Negative Expectancy

  • #261
  • Aug 24, 2009 2:54pm Aug 24, 2009 2:54pm
Quoting pipmutt
Am I misreading this?

The market's ebb and flow is clearly visible on an intraday chart.
Unquestionable - but there are of course other time frames - even a H1 has ebb and flow patterns and if I take the X and Y axis levels of a chart, it will be very difficult for you to tell me whether you are looking at a daily or M5 chart.

It is your interpretation of the action in your chosen time frame that makes you identify and explore the patterns.

regards
daytrading
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  • #262
  • Aug 24, 2009 3:06pm Aug 24, 2009 3:06pm
Quoting daytrading
Yes, yes, Scotty - but you are already at extreme points of the graph and time....
Yes, In the same right, I don't believe we absolutely need to have the volume data to be successful, but it's very helpful nonetheless. I am a huge believer in simple S/R trading. Often times I will check the volume data to simply back up a possible S/R trade I am looking at.
  • #263
  • Aug 24, 2009 4:20pm Aug 24, 2009 4:20pm
Quoting FX-Petra
As to question # 1: Proving randomness in any forum, market or otherwise, is an exercise in futility. Many great minds have written papers and proofs trying to prove or disprove it's exisitence. Holes can be poked in all of them. I do not care if the market is random in a holistic fashion. As I have stated earlier, it is certainly not random to some players. I only care that it is random to small retail traders, of which I am one. I base my assertion of randomness on the following 2 principals:
1) system tests-- I have tested a large number...
FX-Petra, you seem to be an ideal candidate to have your brain wiped and for you to start again in trading. You are labouring under a veritable mountain of false beliefs and nonsense, for you to unlearn this would be a herculean task! But nonetheless, if you are to ever be a trader it is a task you must face.

I could probably write a small book about your misconceptions, but let me tackle the primary one first. As I used to work at a prop trading firm I am friends with several successful full-time traders, some of whom still trade for prop shops and another few who have 'retired' to trade their own money. The only commonality these traders have, is that some part of what they do is discretionary. Of course they all look for defined setups such as a pullback after a breakout, but then they all also have many years of experience of staring at charts for ten hours a day, which gives you the ability to read subtle signs from price action and volume that are literally invisible to traders without those years behind them. This enables them to get in at better price than you, get out at a better price than you, average up on winners, etc etc

Another thing I want to point out, is this bizarre idea that anyone with a successful 'system' is massively rich. Personally although I am comfortable I have no desire to be massively rich and if I were to try to achieve that it would skew my psychology to the extent that I might well become a poor trader. I trade for the freedom from the rat-race, I will never have to suck up to a manager again, I can take a day off whenever I want, and can never be fired. Money genuinely is an aside for me. Most of my friends that trade full-time are not driving around in Ferrari's and sunning themselves on Yachts in Monaco, they are just everyday guys who are living the dream of a life of total freedom.

The last thing I need to pick up on is the hilarious idea of 'the big guys' running stops. They couldn't give a rats ass where any stops are, and this just doesn't happen. Stop running is like the bogeyman for retail traders, they know it doesn't exist really but they still like to tell scary stories about it. Not to mention use it as an excuse for their failure. "I would have closed that trade for a 2pip profit but some damn trader at Goldman-Sachs must have ran my stop with his $200mil order, AGAIN!"
  • #264
  • Aug 24, 2009 9:24pm Aug 24, 2009 9:24pm
Quoting Virtuos0
FX-Petra, you seem to be an ideal candidate to have your brain wiped and for you to start again in trading. You are labouring under a veritable mountain of false beliefs and nonsense, for you to unlearn this would be a herculean task! But nonetheless, if you are to ever be a trader it is a task you must face.

I could probably write a small book about your misconceptions, but let me tackle the primary one first. As I used to work at a prop trading firm I am friends with several successful full-time traders, some of whom still trade for prop shops...

I agree with this, having a decent method/system is a start, but experience and the ability to pick up on small things tip the odds even further on your side. Consistent trading requires experience, and that does come from spending endless hours in front of the screen, and paying attention.

Daytradings earlier point about how the market is different from a casino is right on the money. I would add also, that when you place a trade there is potentially no limit to how much profit that trade can make you, the odds and payout change constantly. And since the market has a tendency to follow through with momentum, situations that offer these types of odds occur frequently, and often enough to allow you to make money.
  • #265
  • Aug 24, 2009 9:25pm Aug 24, 2009 9:25pm
Quoting Virtuos0
FX-Petra, you seem to be an ideal candidate to have your brain wiped and for you to start again in trading. You are labouring under a veritable mountain of false beliefs and nonsense, for you to unlearn this would be a herculean task! But nonetheless, if you are to ever be a trader it is a task you must face.

I could probably write a small book about your misconceptions, but let me tackle the primary one first. As I used to work at a prop trading firm I am friends with several successful full-time traders, some of whom still trade for prop shops...
Well I suppose we must agree to respecfully disagree with each other. I am not going to restate all that I have said here. I will direct your attention to post #132 of this thread and ask if you would kindly answer that question. Your answer will determine if further discourse would be fruitful. I have simply asked if anyone could explain how they turned a negative expectancy into a positive one. So far, the answer has mostly been "money management". As I have stated ealier, it is scientific fact that money management is not enough to overcome negative expectancy. If you and all your friends are successful daytrading the retail forex market, then I am happy for you. I don't understand why you would be happy with 50K a year when 500k (or more) is lying on the table, just waiting to be picked up. When you back a dump truck up to an ocean, does the ocean care if you take one drop or a truck full? If you have achieved a system with positive expectancy, the amount you take from the market should be of your own choosing. If not for you, there are a lot of hungy children in the world who need the help. In fact, there are a lot of great causes out there. You have achieved positive expectancy in a 1 tillion dollar a day market. Spread some around.

On the issue of various entities running stops. A person I have known almost all my life works for hedge fund in NYC and explained to me how it was done. Perhaps he has made up an elaborate lie just to vex me.... but I doubt it.

Regards
  • #266
  • Aug 24, 2009 11:31pm Aug 24, 2009 11:31pm
Quoting FX-Petra
Well I suppose we must agree to respecfully disagree with each other. I am not going to restate all that I have said here. I will direct your attention to post #132 of this thread and ask if you would kindly answer that question. Your answer will determine if further discourse would be fruitful. I have simply asked if anyone could explain how they turned a negative expectancy into a positive one. So far, the answer has mostly been "money management". As I have stated ealier, it is scientific fact that money management is not enough to overcome...
I think he has answered it in a way, and what hes saying is intuition plays an important part. And remember, just because you have a postive expectancy doesnt mean you can print money at will, granted with decent capital you can make a lot but if you want to stay in the game, you need to keep a sensible risk level...

Come on Petra, I know you are firm in your beliefs because of your past failures, but you do need to keep an open mind. You've admitted your testing wasn't completely comprehensive.

Can I ask for the purposes of discussion, since you say the game is negative expectancy, can you estimate what the house edge is as a percentage? And If so, what do you get?
  • #267
  • Edited 1:41am Aug 25, 2009 1:28am | Edited 1:41am
Quoting FX-Petra
I have simply asked if anyone could explain how they turned a negative expectancy into a positive one. So far, the answer has mostly been "money management".
Money management only keeps risk of ruin minimized (which is important of course) but more important is to enter so that your initial stop is not hit before exit and exit the trade at the moment when price is as much positive as possible. There is no need to predict direction as long as these two are statistically on better side on a big number of trades. Might sound simple but that's it at least for me. There are points in price where price is statistically biased to go to one direction - See this pic http://fxlabs.oanda.com/products/his...erhistory.html - does it tell you anything and more specifically should it? If the market is random, why is there just noise outside the current price?

About stop hunts, yes they do happen. I have a friend in a tier 1 bank and here is a post from former tier 1 bank guy http://www.forexfactory.com/showpost...96&postcount=8 (fti is not just a random trader, read his thread - he reveals his history at some point) Believe it or not but ask yourself, if the revenue of your company [I'm not sure how many people here have run companies] would depend on sweeping stops levels, would you do it? Then ask again in what business banks are?

And once again, here is a link to scientific study about the specific topic of market randomness http://press.princeton.edu/titles/6558.html and http://press.princeton.edu/books/lo/ - nobody seems to have bothered to comment this even though this is a scientific material about market randomness.
  • #268
  • Aug 25, 2009 1:39am Aug 25, 2009 1:39am
Quoting FX-Petra
On the issue of various entities running stops. A person I have known almost all my life works for hedge fund in NYC and explained to me how it was done. Perhaps he has made up an elaborate lie just to vex me.... but I doubt it.
Hi FX-Petra

He wasn't lying to you, stop-hunting is an everyday occurrence especially in this market and anyone who ignores or denies it's existence is trading at a distinct and unnecessary disadvantage simply through ignorance.
  • #269
  • Aug 25, 2009 2:42am Aug 25, 2009 2:42am
with OP, tho interest combined with leverage and tight stop loss is a powerfull tool to tilt that fact from negative to positive. (ofcourse it can be powerfull tool to hurt your account allso if used as it should not be used.)
  • #270
  • Aug 25, 2009 3:36am Aug 25, 2009 3:36am
Quoting mikkom
Money management only keeps risk of ruin minimized (which is important of course) but more important is to enter so that your initial stop is not hit before exit and exit the trade at the moment when price is as much positive as possible. There is no need to predict direction as long as these two are statistically on better side on a big number of trades. Might sound simple but that's it at least for me. There are points in price where price is statistically biased to go to one direction - See this pic http://fxlabs.oanda.com/products/his...erhistory.html...
Hi Mikkom,

I had a look at the Oanda link you provided in your post.

Personally, I would not take any of this as a trading reference unless I was working for oanda. It mentiones that it [their platform] takes into account order types to create these graph's. Firstly, only oanda's orders I assume. Secondly, not every client enters/exits the market via limit or uses stop loss orders in the platform.

I also believe that oanda might have a respectable client base in terms of size (compared to some other retail brokers) but in terms of overall market participation, it is probably nothing but a smithereen.

I would go as far as to say that it is simply a gimmick that might work just in their favour.

regards
daytrading
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  • #271
  • Edited 4:01am Aug 25, 2009 3:47am | Edited 4:01am
Quoting daytrading
I also believe that oanda might have a respectable client base in terms of size (compared to some other retail brokers) but in terms of overall market participation, it is probably nothing but a smithereen.
Totally true and good points. Those graphs were mostly meant to be more of a visual representation [this kind of more extensive order book data is not available anywhere else] of clusters and trader psychology than the whole market, I don't claim anything based on those levels - I just want to point out that they exist at least with this specific broker.

Just for curiosity, you don't think that order clusters [hidden or visible] exist? And if they do, they don't have anything to do with market movement?
  • #272
  • Aug 25, 2009 4:20am Aug 25, 2009 4:20am
Quoting mikkom
Totally true and good points. Those graphs were mostly meant more of a visual representation of clusters and trader psychology than the whole market, I don't claim anything based on those levels - I just want to point out that they exist at least with this specific broker.

Just for curiosity, you don't think that order clusters exist? And if they do, they don't have anything to do with market movement?
Hi Mikkom,

I am sure that clusters exist. I am not sure if they have the same repeatable effect on market movements all the time, and further to this, can a trader at any point in time have a real idea about what a 'possible' cluster will do on any given day or price point on the chart.

It seems to me that this type of inefficiency (we buy cable at 85 because it's likely to touch 00 or conversely we sell at 15 because it might touch 00) is well known, maybe too well and often reverse psychology starts altering the phenomenon. One way to spot it is when the price advances up from 85 but anxious traders begin to liquidate at 95 instead of risking the additional 5 pips. Often the risk associated with such 'limited reward' setups is simply too great.

One thing is in my view relatively certain. That is the fact that more 'small money' is in shorter time frames than in the longer ones. If you see a hammer or doji on an hourly chart, you may have a 50, 60 or maybe 80 pip stop to deal with (an often traded setup), which is acceptable to the risk management of a retail account.

The same hammer/doji (in its appearance) on a weekly time frame has a 400 pip stop/tail. Small money shy's away from tayloring the position size to fit the weekly candle - which is paradox really for the simple reason that if the trader would see the long term trade through, he would make at least the same return involving smaller cost. The reason for this is that while waiting for a weekly setup, the regular trader believes that he will have may more setups in 'his/her' smaller TF - disregarding false signals and cost of multiple executions (and as Petra points out, negative expectancy through spreads on shorter TF's).

There exist many misconceptions about how many pips can be extracted safely in a given space of time. Time is all that matters but the urge for 'instant reward' pushes the avg trader into taking more risk without wanting to acknowledge it.

Sorry for the additional blabla.

regards
daytrading
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  • #273
  • Aug 25, 2009 4:58am Aug 25, 2009 4:58am
Quoting daytrading
....while waiting for a weekly setup, the regular trader believes that he will have may more setups in 'his/her' smaller TF...

the urge for 'instant reward' pushes the avg trader into taking more risk without wanting to acknowledge it.

It's not an unjustified belief though, there usually are more trade set-ups.

There are more reasons for trading intraday than simply 'instant reward', for example a trader with limited capital may find longer term positional trading wouldn't be a viable option.

The risks associated with an intraday trade aren't necessarily greater than say a weekly trade, they're just more frequent....but then so is the potential for reward.
  • #274
  • Edited 5:55am Aug 25, 2009 5:24am | Edited 5:55am
Quoting pipmutt
It's not an unjustified belief though, there are usually more trade set-ups.

There are more reasons for trading intraday than simply 'instant reward', for example a trader with limited capital may find longer term positional trading wouldn't be a viable option.

The risks associated with an intraday trade aren't necessarily greater than say weekly trading, they're just more frequent....but then so is the reward.
Hi Pipmutt,

It might appear that way. If you study 1000+ weekly candles though, you will find that there are significantly less outside bars [which are responsible for false signals in BO trading] than in bars of time frames below 1day and 4H.

On the other hand, you have partly confirmed what I said by your comment about longer time frames aren't always a viable option because of undercapitalization - hence there is (as I pointed out) more 'small money' in the smaller TF's.

Trend changes of hidden trends (on a weekly chart, it is difficult to spot how many times the price is going back and forth for at least 50-10 pips before arriving at its weekly final destination) are what short term traders bank on to extract more profits during the same longer term TF that shows the possibility for one single directional trade for example.

Although it can work that way for the short term trader, it is a proven fact that people find changing their minds about their views (in this instance the market direction) a very uncomfortable issue to deal with. That is one of the reasons, I suggest, that traders often get 'married' to their trades, letting them turn into losers more ofthen than not, despite the fact that there was the true intention just to take some short term profits from those trades.

It has also been researched that lower time frame trading with its more frequent losses has a worse impact on the traders mind despite an also increase in the win rate...apparently a trader does not cope with the style too well (I won't go too far into this one since I would have to dig up the article and re-read it in order to be accurate).

I do not (and cannot) speak for all and every trader, of course - but whatever the true percentages are, the majority still falls into the losing trap - amongst the plentitude of reasons, the above are just some of them.


regards
daytrading
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  • #275
  • Aug 25, 2009 5:46am Aug 25, 2009 5:46am
Quoting daytrading
I am sure that clusters exist. I am not sure if they have the same repeatable effect on market movements all the time, and further to this, can a trader at any point in time have a real idea about what a 'possible' cluster will do on any given day or price point on the chart.
Stop orders transform to market orders when hit, so cluster of stops will always cause a temporary spike in demand (one stop triggers others and so on) - after that everything depends on liquidity and other things but the demand spike [= bias] is always there. I think this is as far as I'm willing to go to this direction because this goes a bit too close to what I consider one of my edges.

By the way I only operate on dailies, I don't daytrade.
  • #276
  • Aug 25, 2009 5:53am Aug 25, 2009 5:53am
Quoting mikkom
Stop orders transform to market orders when hit, so cluster of stops will always cause a temporary spike in demand (one stop triggers others and so on) - after that everything depends on liquidity and other things but the demand spike [= bias] is always there. I think this is as far as I'm willing to go to this direction because this goes a bit too close to what I consider one of my edges.

By the way I only operate on dailies, I don't daytrade.
Of course.

regards
daytrading
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  • #277
  • Aug 25, 2009 6:04am Aug 25, 2009 6:04am
Quoting daytrading
Trend changes of hidden trends (on a weekly chart, it is difficult to spot how many times the price is going back and forth for at least 50-10 pips before arriving at its weekly final destination) are what short term traders bank on to extract more profits during the same longer term TF that shows the possibility for one single directional trade for example.
Exactly, and it's perfectly possible for an intraday trader to make 300 pips out of a 100 pip directional move. While a weekly trader is waiting for his trade set-up and waiting for it to play out (win or lose) an intraday trader could have been in and out a dozen times. It's argued that the frequency of trades can negatively impact long term results but it's not a theory I accept, at least that hasn't been my experience so far but maybe time will prove me wrong.

Quoting daytrading
Although it can work that way for the short term trader, it is a proven fact that people find changing their minds about their views (in this instance the market direction) a very uncomfortable issue to deal with. That is one of the reasons, I suggest, that traders often get 'married' to their trades, letting them turn into losers more ofthen than not, despite the fact that there was the true intention just to take some short term profits from those trades.
I agree, but that's not necessarily a strategy issue, it's more of a discipline one. As an intraday trader myself I don't often have a longer-term directional bias but when I do I will trade it accordingly as opposed to mixing the two strategies. If you're saying traders turn what was originally an intraday trade into a longer term one because it didn't play out then I absolutely agree, changing time frames mid-trade can have disastrous results!

I think we're in agreement about a few things here, maybe we're just presenting them differently
  • #278
  • Aug 25, 2009 6:12am Aug 25, 2009 6:12am
Quoting pipmutt
Exactly, and it's perfectly possible for an intraday trader to make 300 pips out of a 100 pip directional move. While a weekly trader is waiting for his trade set-up and waiting for it to play out (win or lose) an intraday trader could have been in and out a dozen times. It's argued that the frequency of trades can negatively impact long term results but it's not a theory I accept, at least that hasn't been my experience so far but maybe time will prove me wrong.



I agree, but that's not necessarily a strategy issue, it's more of a discipline...
Yes.

I think it would be leading too far away from the actual subject to venture into 'frequency optimization' and the like.

Nevertheless, a good discussion.

regards
daytrading

P.S. we still haven't tackled the thread starters issues conclusively.
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  • #279
  • Aug 25, 2009 6:48am Aug 25, 2009 6:48am
Quoting daytrading

P.S. we still haven't tackled the thread starters issues conclusively.
I think it's an impossible task.

I don't believe anyone can conclusively prove long term profits within negative expectancy because 'long term' isn't clearly defined.
  • #280
  • Aug 25, 2009 7:13am Aug 25, 2009 7:13am
Quoting pipmutt
I think it's an impossible task.

I don't believe anyone can conclusively prove long term profits with negative expectancy because 'long term' isn't clearly defined.
Well, there you go:

When creating a hypothesis, we must test.
The testing procedure must have clear objectives and must also meet established criteria.

There has to be the use of a sample which in turn has to be explained as to the chosen characteristics and its representativeness.

One of those characteristics would be the term over which we could say with some degree of certainty that it reveals conclusive evidence as to the reliability of the collected data for future occurrences.

Now, I believe that Petra mentioned a sequence of 10000 trades as one criteria (sample size).

Another one was the limitation of the time scale that can be traded, i.e. intraday (we have yet to establish the time zone for the experiment: GMT or EST or other).

A further question would be which fx pairs will be allowed for testing, what type of spread should be allocated to each pair to make the testing environment universal enough for it to apply to anyone in the same way.

Since we are testing for net gain (or net loss) over time, the amount is irrelevant unless dynamic money management (or position allocation) is in fact responsible in the model for winning or losing.

Since we are concerned with retail trading, scalability is negligable or at least less important.

Before we can proceed, we should also establish WHY 10000 trades should be taken as a sufficient sample size - and why 5000 trades wouldn't be enough in the cycle.

Also, the sample size suggested limits the experiment to some degree because (as mentioned before), if we trade only 1 trade per day (which would still constitute intraday), we would test for a period of 38 years given an average of 260 trading days per year.

For that matter, we would have to say for example that we take a minimum of 5 trades per day - which would bring the testing period down to 7.5 years (or something in that region).

So, our discussion so far is too widely scattered - although very intersting in many ways.

regards
daytrading
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