Strategy of losers

The debate was raging because of this very point that porkie and trippy have commented on here. This point was assumed to be not relevent but was actually the basis for a lot of beliefs. Now it is out in the open. Thanks guys, I had lost all hope of finding common sense on this forum.

"i believe that the bigger the discretion gap, the more the door is left open to all the emotional problems we hear so much about"

Yes that was the quote. I believe this right here, this very point, is the holy grail. People are searching for it so desperately, so blindly. It is the great lie, the big con. People invest so much energy believing it to be true. I know because I have done it too.

That the Truth stands clear from error?

I am assuming that your quote about the 'discretion gap' as you call it refers to, or let's you believe that mechanical trading systems are the only way to trade profitably without the interference of emotions?

If my assumption is correct, let me put a few aspects of mechanical trading forward. I have enough experience with those since I have constructed two very successful models (in the spirit of Richard Dennis) that do not rely on the traders decision-making process (discretion) in any way. The risk adjusted average annual return over the past 5 years (incl. 2009) is in the region of 30%.

The pitfalls associated with those type of trading models and the 'emotional stress' are enormous. The discipline required to NOT interfere with the models in heavy draw down periods is more than most traders can sustain. If you analyse the Turtle experiment, you will know that despite the experiment being a success for some (since it was not Dennis' goal to make successful traders out of all participants - only to show that the trading style could be taught in principle), most of them could not handle the pressure nor did they have the discipline required to trade a fully mechanical system without interference - that was up to this point very profitable.

'Up to this point' is very important to the discussion because one of the biggest challenges for a trader is to trust a model that has worked in the past over a significant period of time and to assume it will continue to do so in the future. Mechanical trading systems are unable (due to the nature of their rigid construction and execution parameters) to respond to paradigm shifts in the market. So, when a trader finds himself in the middle of a lengthy draw down (a whole year of negative return is not uncommon, let me assure you), how will they react - physically, emotionally/mentally? Besides the recorded data about the Turtle experiment, statistics show that at some point during those periods most traders either abandon the system, override it or lose faith in its future profit potential - despite of its (so far) proven edge.

It is a further fact that the markets have a habit of ironing out anomalies which make mechanical trading models work well on a temporary basis.

I would also make a strong point to distinct between forms of discretion. There is in my view a great deal of difference between someone with many many years of profitability and trading experience who decides to enter trades on a non-mechanical basis (which can still be systematic trading though), or when a novice is attempting to do so.

Ultimately, my point still stands firm - that an edge without discipline and patience is pretty much worthless; even when it means to use those emotional traits in order not to make the decision to interfere with system that requires the constant unshakable belief in its future profitability - which ironically is very often misplaced.

regards
daytrading

Look I agree with everything you said, I however never said mechanical trading systems were the only way to trade profitably.

All I am saying is that I believe many traders fool themselves into thinking that

a) they have an edge
b) the edge is not yeilding consistant results because of the them; their lack of disclipline, patience, money management, etc
c) 'discretion' in the approach is the magical key to solve the problem, when this element is unknown or not rule based (the discretion gap)

This is why I am so insistant in the 'show me proof' line as triphop calls it. The onus of proof in any method falls squarely on the edge. Discretion has somehow been written into the contract, so if the method fails its the traders fault automatically, and the edge is untouchable. A market characteristic is not necessarily an edge.

I know you didn't - that is why my post started with the word 'assuming'.

What we can agree on though is that some very important points have been highlighted in the discussion and that is definitely the way forward - especially for the readers.

I have to get back to research and trading now, but it has been a pleasure contributing.

All the best,

regards
daytrading

Peace bro, good talkin!

daytrading, I tend to disagree.

If an automatically system fails after a while, you can adjust the system or develop a better one.

If your discretionary way of trading fails, what do you do? If you lose 20 in a row you will start questioning your experience. It is more damaging to fail discretionary than automatically. That's my opinion.

In the end, if you can do it discretionary it simply means that other person can do it automatically, by being able to put in a formula which you can't say in words.

OK -

what constitutes 'a while'? When do you know as a mechanical trader that your system is not just in an extended DD period compared to a failing model?

If it was so easy to construct a durable mechanical system, why are banks and funds constantly hiring quant developers? Because they now the limited shelf life of these models and your average trader lacks the ability to work with large complex data sets.

Finally, as I mentioned in a previous post, discretion can be quantified to a degree as well by experienced traders - its the new traders who without the experience are failing when it comes to knowing how to explain why they do (did) what they do (did).

regards
daytrading

The discussion can continue ad infinitum.
I think that there are automatically trading systems which provide good ROI year after year. Maybe they need small adjustement from time to time but they work and they don't have big drawdowns.
You'll not find them for sale. If mine works I will not sell it. If not, maybe I will.

The institutions have other information at hand. I can't compare myself to them. And I'm sure that some of their traders use automatically systems.

....and yet the market is random? Back to Mount Doom Sauron.

there is a distinction between the market being random and having an edge.

"1. Anything can happen.
2. You don't need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an
edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over
another.

5. Every moment in the market is unique."

Mark Douglas

Well guys,

The first post of this thread asked the question "Why do losers lose?"

Isn't it clear? After all the debating? All the insults and accusations of idiocy? After all the misdirection, double talk and false logic?

The answer to me is clear.

There is no alchemy that will transform a method with no edge into a profitable system. Period. There really is no holy grail.

In fact my strats have worked, they just haven't worked as well as before. I assume it's because there has been much more high volatility whipsaw periods than before - lower "trendiness" even though I don't have any formula to measure it.

I assume that for some strategies this has been good, I read from some other place that for "scalping" strategies this has been a very good period. I don't know what exactly the site meant my scalping strategies.

Sorry Mikkom I meant 'as well as' (rather than not at all). Similarly, for me this summer has been pretty uneventful trading wise too, though it's picked up now, in relation to how much trend there is.

Right then, some of you must be sick of this thread by now, so let's wrap things up, using no Douglas quotes, as he annoys the bejeezus out of me.

Overall, I'm fairly surprised about some of the things I said early on that went without question. The really useful information. I'm not going to leave it as a big mystery because it'll only serve to both annoy, intrigue and prolong what is something that should be wrapped up by now.

In short, the other reason for looking at this as closely as I did was to see if losers are a good contrarian directional indicator. They are - subject to the points made before.

Which is why all this talk about edges and the rest is ironic. Show me the edge? Err... already have. Not that long ago, I PM'd someone (sorry about that, you know who you are) asking them not to discuss this online, thinking that it'd cause the fall of the revolution. Or rather, the disappearance of this particular edge. Then I came to my senses and realised that I wasn't the first to discover this. And it's not foolproof. And it's been out in the open for years.

What does this edge show you? The life and death of a trend. Same as TA seeks to predict, same as fundies, same as order flow can, same as etc etc. And it reveals the answer we're looking for.

So why do losers lose?
- In ranging markets their strategy is as good as random
- In trending markets their strategy is on the wrong side of the tracks
- And in all markets, they'll let their risk be a function of their own trading success or failure rather than a function of market conditions. Naval-gazing. Or in this case, naval-trading

If you excuse the swearing, I keep a journal of all trades, and this one from a way back speaks volumes. I'd lost a serious amount of money (insert amount that's serious to you) by fading and failing, fading again and failing, and then ramping up massively and joining in the trend. Naturally, failing. A triple cock-up. And I wrote in frustration about my own shabby trades:
"Seriously, what kind of a c*nt trades like this?"

Answer? Most retail traders, so don't be one of them.

Trade well!

Near-Perfect Market Indicator Discovered
Years of Research Reveals Consistent Trading Edge in Aurora, IL


Stock market researchers at the University of Chicago yesterday announced a breakthrough in their efforts to find the perfect market indicator. He is Delbert Dunmore, a home-based trader in Aurora, Illinois.

According to Giovanni Celini, Ph.D. of the University's Institute for Market Research, Mr. Dunmore has failed to make money for 18 consecutive years of trading, with only a single month of gains during that time.

"This is a result far beyond chance," Dr. Celini noted. "Mr. Dunmore has been remarkably consistent in his ability to lose money."

At first, the University researchers thought that Dunmore had discovered a key to losing in the markets. Only after careful observation, however, did they find that Dunmore himself was the key.

"The man has incredibly poor judgment," Dr. Celini reports in The Behavioral Finance Journal. "We call it a 'Reverse Midas Effect': everything he touches turns to shit."

Dr. Wayne Byerly, behavioral finance researcher at Cornell University, believes that the Reverse Midas Effect may win the Chicago researchers a Nobel Prize. "Mr. Dunmore is helping us answer questions that have never been asked before, such as 'What keeps people trading when they are so obviously devoid of talent?'"

None of this seems to faze the 42 year old Illinois trader, who was recently hired by a well-known New York investment bank to head their Contrary Opinion desk. "People say I lose all the time," Dunmore explained, "but at least I'm good at something." Indeed, his incredible consistency has brought him celebrity status, as he recently shared a STuBY award with Native Americans, Salem witches, and the Chicago Cubs, honoring America's greatest losers.

His brush with fame, however, almost never came to be as he recently experienced his first winning month in nearly two decades of trading. "I felt pretty good coming into June," Dunmore explained, "and I bought a boatload of Harold's Stores (HLD) stock in the middle of the month. I didn't realize that I typed in the wrong symbol, though, and wound up owning the exchange-traded fund for gold (GLD). Damn thing went through the roof."

This was quite a blow for Dunmore. "I couldn't believe I lost my losing streak," he lamented. "For days, I went around feeling like a total loser."

Lately, however, the Chicago suburbanite has returned to consistent form, as he shorted the oil market after reading an online bulletin board tip that massive new hurricanes had not demolished the Gulf coast overnight. This trade was so spectacularly misconceived that it landed Dunmore a spot on a local access cable television show in Aurora.

Dunmore attributes his success as a market failure to a strategy a trading coach helped him implement many years ago. "At the end of every year, I replenish my trading account," he explained. "If I didn't do that, I'd never have become the trader I am today."


This is an article from 'Trader-Feed' hosted by Brett Steenbarger from July 2006.

Sounds just like what you were researching.

regards
daytrading

I properly laughed DT, nice touch

Can someone explain how to interpet this chart of open interest please?

Cheers J

It has nothing to do with open interest rates. Its just some kind of raw overview of their orderbook (where traders prespecifiy limits).

try a non cumulative graph