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  • #61
  • Apr 13, 2010 1:17pm Apr 13, 2010 1:17pm
Quoting mathematician
Like it or not, this thread has evolved into new topics...they always do. Anyways, here it goes...
Excellent points that highlight major reasons why consistently profitable trading is so difficult. IMHO.

Quote
Now there are more sophisticated mathematical methods that people can use...but to me, using all that complex mathematics to try and trade is like trying to kill an ant with a machine gun. (And this is coming from a guy who loves mathematics!) What can I say? I like my trusty trend line. It's simple and reliable.
I've gravitated to discretionary trading out of much the same necessity, and - as a programmer - it feels like I'm betraying all of my core instincts.
  • #62
  • Apr 13, 2010 1:54pm Apr 13, 2010 1:54pm
Quoting hanover
I've gravitated to discretionary trading out of much the same necessity, and - as a programmer - it feels like I'm betraying all of my core instincts.
whatever gives you the balls to pull the trigger is good enough usually. the rest is understanding your place in the market.. to take risk manage it and manage profits in a way that doesnt increase risk..
  • #63
  • Apr 13, 2010 2:36pm Apr 13, 2010 2:36pm
Quoting mathematician
Now the Law of Large numbers works when your experiment fits nicely into a known probability distribution and you know the expected value for that distribution. But what distribution do prices follow?
great post, and this conclusion rocks
  • #64
  • Apr 13, 2010 2:42pm Apr 13, 2010 2:42pm
Quoting mathematician
Like it or not, this thread has evolved into new topics...they always do. Anyways, here it goes...
You sir deserve my vouch, however, please accept my apologies for i do not have any vouches to give..

It's the thought that counts, right??
Time flies like an arrow; fruit flies like a banana.
  • #65
  • Apr 13, 2010 2:55pm Apr 13, 2010 2:55pm
I have a suggestion to this idea. What about if you used the Martingale method but after the first trade fails you then place a trade of double the amount in the direction in which it is now going. Using this on a pair such as GBP/JPY should work due to the volatility.
  • #66
  • Apr 13, 2010 3:21pm Apr 13, 2010 3:21pm
Quoting latham01
I have a suggestion to this idea. What about if you used the Martingale method but after the first trade fails you then place a trade of double the amount in the direction in which it is now going. Using this on a pair such as GBP/JPY should work due to the volatility.
In all fairness, you could just lose 3 times the amount. It's a coin toss sir, 50-50 or close to it. Just b/c you got stopped once doesnt mean ur guaranteed a win the next time you trade..
Time flies like an arrow; fruit flies like a banana.
  • #67
  • Apr 13, 2010 3:30pm Apr 13, 2010 3:30pm
Quoting Bwana
In all fairness, you could just lose 3 times the amount. It's a coin toss sir, 50-50 or close to it. Just b/c you got stopped once doesnt mean ur guaranteed a win the next time you trade..
Indeed, but the pair would have to keep within a 40 pip channel which doesn't happen on GBP/JPY
  • #68
  • Apr 13, 2010 4:18pm Apr 13, 2010 4:18pm
Quoting hanover
Excellent points that highlight major reasons why consistently profitable trading is so difficult. IMHO.


I've gravitated to discretionary trading out of much the same necessity, and - as a programmer - it feels like I'm betraying all of my core instincts.
I know the feeling. When I first started trading, I thought my mathematics background would give me a huge advantage. I was going to be the one who "cracked the market" through some elegant mathematical discovery. Now I know better. I don't know what I was thinking. Trying to use pure mathematics in trading is like bringing The Queen to a monster truck rally.

I've found that the more practical I approach my trading, the better my performance. It's kind of nice because I am used to working with very ideal and...well impractical concepts, so trading is a way for me to think and act in a completely new way.
  • #69
  • Apr 13, 2010 5:18pm Apr 13, 2010 5:18pm
There are many, many traders using automated systems based on quantitative analysis that have an edge. The fact that you couldn't develop a system does not mean you cant profit that way. Of course there is no formula or model that will bring profit every day in every market. If you look at he guys using quants and automated trading they have lots of systems that are reacting to market changes and performance is monitored continually using statistical measurements.

I admire anyone who can trade using discretion, not only have you to find an edge but also execute that every day on every opportunity that arises.
Economists have forecast 9 out of the last 5 recessions
  • #70
  • Apr 13, 2010 6:36pm Apr 13, 2010 6:36pm
Quoting latham01
Indeed, but the pair would have to keep within a 40 pip channel which doesn't happen on GBP/JPY

Try it and see. GBPJPY will range in a small channel like that enough to frustrate you, so stick with London and early NY sessions.

I tried something like this when I was started fx. Turned out that my broker widened the spreads on GBPJPY to about 25 pips and ruined my great idea.

Even with normal spreads, say 8 pips, you are looking at 12 pips to a SL and 20 pips to a TP, so it isn't as simple as reversing the direction of the trade. Plus, if price is ranging, you run a risk of selling bottoms and buying tops.
  • #71
  • Edited 7:45pm Apr 13, 2010 7:44pm | Edited 7:45pm
Quoting mathematician
However, if you consider a trader who has been consistently profitable for many, many years, I think it's ridiculous to consider his success to be entirely luck. Such a trader obviously has a skill, and managing quasi-randomness is precisely that skill.

Of course some people do get rich entirely by chance:
a) I won the lottery! Yay!
b) My uncle suddenly died and he left me $1-million. Yay! err...I mean, poor uncle.
These two ideas relate. Most people who chance into money, soon lose it through mismanagement.
  • #72
  • Apr 13, 2010 9:24pm Apr 13, 2010 9:24pm
What if you combine martingale with High Probability Trading? If you discover a HPT method with, for example, 2/3 of rate success by backtesting for the past 10 years, you have now a (1/3)^n of probabilities to fail with n levels of martingale, that are very less probabilities than (1/2)^n of an radomly method. You have 1 chance in [1/((1/3)^10)] or in [3^10] of fail with 10 consecutive levels of martingale that is much better than the 1 chance in 1000 of 50:50. I think this is the key, first find a method with 2/3 or 3/4 rate of success in almost past 10 years and then, add the martingale.

With a 3/4 of rate success and 10 levels of martingale, you only lose 1 trade in 1 million, and if you make a good MM you may "only" lose 50% of your portfolio in that trade, money that you can recover in a few thousands trades after...

Here you can see a table with the chances of fail with this combination:
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  • #73
  • Apr 13, 2010 9:36pm Apr 13, 2010 9:36pm
I want to add that for testing the success rate you have to put the SL at the same distance of the TP, but you can play with success rate if you modify the SL/TP relation, for example, if your TP is 3x the distance of your SL, when you win you win 3x the pips that you lose when you lose, this means that if you only win 1/4 of trades with TP=3xSL, the success rate is, in fact, 3/4.
  • #74
  • Apr 13, 2010 9:41pm Apr 13, 2010 9:41pm
I was lost at "flicking".
  • #75
  • Apr 13, 2010 9:45pm Apr 13, 2010 9:45pm
Quoting Trad3r
What if you combine martingale with High Probability Trading? If you discover a HPT method with, for example, 2/3 of rate success by backtesting for the past 10 years, you have now a (1/3)^n of probabilities to fail with n levels of martingale, that are very less probabilities than (1/2)^n of an radomly method. You have 1 chance in [1/((1/3)^10)] or in [3^10] of fail with 10 consecutive levels of martingale that is much better than the 1 chance in 1000 of 50:50. I think this is the key, first find a method with 2/3 or 3/4 rate of success in almost...

MMM I'm thinking now that I'm in fact WRONG! The probability for the n entry of a martingale don't to be necessary the same than the original entry, it would be 50%... So the real chances of fail would be the following:

Sorry about my previous post, I'm a bit confused with probabilities, yes, the answer is that martingale is a waste of time, the chances of fail in one single trade are too much elevated even with HPT...
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  • #76
  • Apr 13, 2010 10:04pm Apr 13, 2010 10:04pm
Quoting Trad3r
What if you combine martingale with High Probability Trading? If you discover a HPT method with, for example, 2/3 of rate success by backtesting for the past 10 years, you have now a (1/3)^n of probabilities to fail with n levels of martingale, that are very less probabilities than (1/2)^n of an radomly method. You have 1 chance in [1/((1/3)^10)] or in [3^10] of fail with 10 consecutive levels of martingale that is much better than the 1 chance in 1000 of 50:50. I think this is the key, first find a method with 2/3 or 3/4 rate of success in almost...
my calculation shows that the probability to have at least 1 row of 10 consecutive losses in 1 million trials, given the 75% of success in each trials, is 61%.

As usual I could be deathly wrong!
  • #77
  • Apr 13, 2010 10:22pm Apr 13, 2010 10:22pm
Do not use a martingale. It's high-risk, low-reward. It's just a bad idea.

The Math

As we've said before on this thread, a string of 10 losses in a row is certainly possible. Let's see what happens with a martingale if you risk just 1% of your account per trade.

1% + 2% + 4% + 8% + 16% + 32% + 64% = 127% oops! You can't risk more than 100% of your account. So we have to stop at 32%. But that's only 6 levels of the martingale. We have to expect that eventually there will be a string of 10 losses, so we need to accommodate at least 4 more levels. We can't double the 32% because we go over a total of 100%, so we have no choice but to start with something smaller than 1%. To add four more levels, we have to start with a risk of a miniscule 1/16th of 1%, i.e. 0.0625%. (Well you don't have to. But if you start with much more than that, you'll be close to risking 100% once you get to the 10th level).

0.0625% + 0.125% + 0.25% + 0.5% + 1% + 2% + 4% + 8% + 16% + 32% = 63.9375%. Wow! That's a scary drawdown, but it will pull us out of a string of 10 losses.

But wait a minute! 0.0625%????? Even if you have $1-million 0.0625% of that is just $625. You literally need millions of dollars just to make this worthwhile! If you have that much money, you don't need to trade the forex. Just put your millions in risk-free government bonds and enjoy your life.

The Psychology

If you are considering a martingale, it's probably because you are not able to handle a loss. The martingale is a form of revenge trading. Learning how to accept a loss is one of the most challenging psychological hurdles in trading, but it is essential.

Trying to make back lost money on the very next trade shows a complete intolerance for losses. The way to cope with a loss is basically to just let it go, knowing that it's just one trade and that there will be thousands more to come. It's also much easier to take a loss when it's a relatively small loss. With a martingale, they keep getting bigger.

It took me about three years before I even knew I had the problem of not being able to take a loss. It might take years before you fully learn how to accept a loss. But you have to do it. Once you master how to take a loss, you can focus on the next psychological challenge: How to handle a string of losses. (Don't say martingale. )
  • #78
  • Apr 14, 2010 2:09am Apr 14, 2010 2:09am
I know what you're saying, but technically there is no way to run out of levels when you bet martingale on fixed fractional.
Obv, you will be betting an amount that will render you practically bankrupt.

Actually, in my experience, people who use the martingale money management strategy, don't use fixed fractional in conjunction, just fixed lots.

I'm sorry if i'm nitpicking, but i thought you might have some other insight here, so making sure. Are u talking about the fractions in "absolute terms", without regard to balance left but with respect to the original portfolio balance instead?
  • #79
  • Apr 14, 2010 2:22am Apr 14, 2010 2:22am
Many of the posts around here seem to miss the point or maybe i d ont understand them very well. Is it true that you can get a random series of say 10 consecutive heads if you flip a coin ? that is the question that should bother a statistician not a trader. from a trader point of view the situation if different. yes of course you double up from say long euro usd at 10000 $ 1.5 then 20000 $ at 1.48 then 60000 $ at 1.45... and some point some day you will get in a loosing row. but for the trader the situation is different than from the head and tails or the red and black at the casino. it all depends on what you define as loosing and or winning is loosing means you dont get back to the initial level because you don t have enough money to double, then yes... but remember that if you double up at say 1.45 you don t need to go back to 1.48 to score a win you only need half way it means 1.465...
from then you close all on profit. people blaming this system tend to treat all events as independent, which statistically is correct but from a trading point of view not relevant. it means that you as a trader randomly cannot expect to have more than 50 % wins on very long sequences and sometimes you can get 10 looses in a row and wipe out your account. but a trader is not a statistician not all entry points and exit points are equal one must take into account that some entry exit points are more meaningfull than others, i.e they may be independent events from the previous entry points but are not entirely random since they are influenced by external events (interest hike, policy statements etc). further more prices may swing and coins don t and the best metaphor for the trading is not tossing a coin but tossing a coin while doubling up AND having the capacity to stop the coin in the air when it is on your favorite side, which is exactly what trading is about, i.e if i enter at 1.45 eurousd long i don t need to wait to close the day at 1.48 i just need it to touch it at least one time because the price can go m in a given time frame from 1.45 to 1.482 and then close at 1.44 and i would still make a profit .


so i suggest we move the discussion away from the deadlock where it is now, where every one agrees that random series can go wrong and move it with the aim of understanding how doubling up as a trading strategy combined with other tools (s loss, entry points,close on profit at some levels ) can work
Andreyou
  • #80
  • Apr 14, 2010 3:13am Apr 14, 2010 3:13am
Quote
that is the question that should bother a statistician not a trader. from a trader point of view the situation if different.
Considering that a trader deals with stats and probability, it's a question for a trader as well. I can't imagine a good trader without a decent grasp of the underlying maths.

Quote
but for the trader the situation is different than from the head and tails or the red and black at the casino
No it isn't. The difference is only a shuffling of numbers. Same principle. The fact that traders can manipulate winrate, that events are correlated etc is irrelevant.

Quote
the best metaphor for the trading is not tossing a coin but tossing a coin while doubling up AND having the capacity to stop the coin in the air when it is on your favorite side
In other words, the ability to quit when ahead, which a gambler can do during a session. It can be argued that the trader isn't flipping a coin during a trade, but managing constant coinflips. Every tick could be described as a coinflip, and in this way the trade is equivalent to a gambler's session. However, this is all completely irrelevant, since the fact is that probability is a factor for both the trader and the coinflipper. A trader having skill, or the ability to quit when ahead is completely irrelevant in this discussion, which is Martingale is a poor strategy.
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