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Long term Profits within Negative Expectancy

  • #341
  • Aug 25, 2010 7:27am Aug 25, 2010 7:27am
Well this is totally confusing..because if we see logically with the binary regressions that is most difficult to archive in long term or perhaps some other smart thinking behind ..this..but at least some one will not such a thing to gain long term revenues..since then every one start doing the same..

Thanks&Regards:
Albert.
  • #342
  • Aug 25, 2010 12:42pm Aug 25, 2010 12:42pm
Mr. J,

I'm not sure what you mean by a 30% edge. If by that you mean that, given a 1:1 RR, you win 65% of your trades and lose only 35%, I would ask how long you have traded such a system. If you could achieve that type of success over any length of time... I would appeciate an invite to sail on your yacht and give me a chance to understand how you do it! No yacht yet? I do not believe such a system---daytrading--- can be sustatined.

While it may seem that trading is similar to poker and other casino games, it is diffrent in some crucial ways. If you want to make long term extrapoltions based on a few dozen trades.... well, it is your money. I wish you well. I hope everyone wishes you well. You will need all the positive vibes you can get.

Regards,
  • #343
  • Edited 11:34am Aug 26, 2010 2:15am | Edited 11:34am
I have heard it said by one of the most famous long term profitable traders in the game
"some of the best intra day traders trade off the daily charts" ...food for thought ?
  • #344
  • Sep 1, 2010 9:27am Sep 1, 2010 9:27am
Quoting Scotty B

If anybody is interested in futures and the use of limit orders, CME is rolling out new "Micro Forex Futures" where ticks are worth $1.25 USD instead of $12.50 in a standard contract.
But liquidity would be a problem, no?
  • #345
  • Oct 6, 2010 11:31am Oct 6, 2010 11:31am
Quoting FX-Petra
I have been doing some research lately focusing on the first 1000 trades of any system. I will not go into all my findings here, but I will say that your first 1000 trades yielding profit has almost as much to do with statistical variance as it does any small "edge" a trader might have.
I am very interested in any small summary of your research you can share regarding this.

One more question for any of the talented mathematicians (I am not unfortunately) or statisticians:

Using a previous example:

Given a R:R of 1:1 and a win% of 65%, loss% of 35%, how many trades do you need to have a 95% confidence of this NOT happening by chance (or statistical variance)?

My question arose from reading this article:
http://www.tradejuice.com/system-tra...ing-system.htm

Basically, the author is saying that increasing the sample size from 500 to 1000 trades assuming a 95% confidence level, is a difference in margin of error of only 1% approximately.

Any thoughts or rebuttals appreciated.
  • #346
  • Oct 6, 2010 1:37pm Oct 6, 2010 1:37pm
Hi, Intu

I took 5 indicator based systems (short-term ones) and pitted them against 5 random entry systems. I am not going into detail on each of the systems, but will give a brief description. Each was backtested for 1000 trades. Equity % postions are given:
1. A 5/12 ema cross over ---- -11%
2. A pivot based on 38.6%---- +28%
3. A MACD based system----- -18%
4. An RSI system----- -38%
5. A Bollinger Band System----- +17%
Total = -22% Roe after 1000 trades


1. Random # 1-------- -14%
2. Random #2 -------- -26%
3. Random # 3-------- + 62%
4. Random # 4-------- +31%
5. Random # 5-------- -42%
Total = +11% Roe after 1000 trades

The most intresting thing that I found was ending equity as it relates to total spread costs. In both cases (non-random and random), ending equity was within 1 standard deviation of "expected" transaction costs.

I am not saying that random is always better than non-random. I could well run these tests again today and find the outcomes reversed. What I am saying is, at least as it relates to the first 1000 trades, a little luck (or positive variance) goes a long way!!!!

Regards
  • #347
  • Oct 7, 2010 2:26am Oct 7, 2010 2:26am
Quoting FX-Petra
Hi, Intu

I took 5 indicator based systems (short-term ones) and pitted them against 5 random entry systems....
"I took 5 indicator based systems" HUH

I never found an indicator based system that worked...... i use price action ,ATR , trend-lines and support resistance only(ish).
I trade at 1% risk per trade. This is implemented with the creative discretional approach of finding an edge in the markets which has been aquired from hundreds of hours trading through changing market cycles ......and no, you cannot express that as a system ! ........CREATIVE ( hint hint )

These "systems" sound very dodgy, or am i missing the point !



The first 1000 trades ..... HUH ? by the time i have executed 50 trades my system has begun evolving to adapt to market conditions so i really don't understand this fetish with backtesting a huge sample size.

Its been a while since i last posed in this thread.....have you started trading yet Petra.
  • #348
  • Oct 7, 2010 9:20am Oct 7, 2010 9:20am
Been trading off and on (mostly on) since '02. Yes, you are missing the point. No, I am not getting into another long, energy sapping discussion to restate what has already been discussed in this thread. If you have a method that is presently working for you, then I congratulate you and wish you continued success. My only reason for posting something else in this thread was to respond to a specific request from Intu. I have another thread here http://www.forexfactory.com/showthread.php?t=214222 that gives a brief update of where I am at on my journey.... although I have not updated it in a while.

Kindest Regards,
  • #349
  • Oct 7, 2010 6:11pm Oct 7, 2010 6:11pm
Cheers

P.S i agree..... short term daytrading FX is for mugs... swinging is where its at
  • #350
  • Dec 12, 2010 10:08am Dec 12, 2010 10:08am
I woke up thinking about these things this morning, Googled the internet, and found your perfect article. Thank you for your thoughts and information.

The most amusing part was to read some of the poorly thought our responses. With such people trading the Forex it still gives me hope.

Question: Trend traders seem to have done well over a period of many decades. Since markets do trend, is that reason to have hope of gaining a positive expectancy? My assumptions are: I do not know which market will trend; I do not know which direction the trend will go; I do not know when the markets will begin to trend. My solution is always be in as many markets as possible bracketing the current prices to get on board during a breakout. Stops to cut losses short. Trailing stop to let profits run. Nothing new here. Your thoughts are appreciated, thanks.
  • #351
  • Dec 29, 2010 11:48pm Dec 29, 2010 11:48pm
Quoting dpcjsr
I woke up thinking about these things this morning, Googled the internet, and found your perfect article. Thank you for your thoughts and information.

The most amusing part was to read some of the poorly thought our responses. With such people trading the Forex it still gives me hope.

Question: Trend traders seem to have done well over a period of many decades. Since markets do trend, is that reason to have hope of gaining a positive expectancy? My assumptions are: I do not know which market will trend; I do not know which direction the trend...
Sorry for my tardy response. I haven't checked this thread in a while. All I can offer is what works for me, but I have found these few simple thoughts that have helped me turn the corner.

1) I only take trades in the direction of a clear daily trend.
2) Wait for a nice pull back on the 4hr chart in the opposite direction of the daily trend. (at least 6 candles, 10+ is better)
3) Look for 2 4hr candles together that close back in the direction of the overall daily trend.
4) Pull the trigger, place stop 20 pips below the low point of the retrace. Target well above (or below) the last swing of the daily trend... usually at least 50-75 pips above the last swing.

Boring, I know...but usually profitable.

I'm glad you took something from this thread. I have chatted with others who have also found it useful. If it has saved anyone some money along the way.... well, that's what I started it for. Happy new year and good trades to you!!

Regards,
  • #352
  • May 12, 2011 12:14pm May 12, 2011 12:14pm
Seems gambling and forex have been a hot topic for the last few days on the news boards. Thought I might bump this old thread.... some may find it intresting.

Regards,
  • #353
  • May 17, 2011 8:36pm May 17, 2011 8:36pm
Quoting FX-Petra
Trading retail forex is a negative expectancy activity... I hope that everyone can see that, from a probability standpoint, forex is negative expectancy.


I actually don't see that at all. If we are talking strict mathematics, then we have to be talking about mathematical probabilities and how we derived them computationally. If that's the purpose for defining "expectancy," then it is probably best to use the term "mathematical expectancy," and if we do that, then we can't possibly have a serious discussion about expectancy by ignoring either the discrete random variable, or the continues variable used to determine the probability structure. Quite frankly, even having a degree in Mathematics, I don't know how you pull that off, in relationship to taking about how to determine the "expectancy" of Forex Trading, by initializing the definition with the fact that there is a negative spread. If you can show me how you structure that in an iterative fashion, the maybe I'd have a better idea of the definition that you impose.

On other side of the definition you gave, it is not always the case that your Filled Price is going to be equal to your Executed Price, upon entry into the market. I've entered the market on occasion and during the phase between Execution and Fill, I actually had a net positive spread on the entry, for all practical purposes. Not merely zero, but actually net positive. Does that happen often - no. But, it does happen.

But, for the sake of dialog, I'll quasi go along with the "outset" of each trade having a component of "negative expectancy," although I cannot find the mathematical derivation for arriving at such a conclusion, merely because the spread is often times has a net negative impact on P/L at the outset of most trades. But, I digress.


Quoting FX-Petra
Quoting FX-Petra
So, how to overcome this negative expectancy? You must have a system that correctly predicts the direction of a currency pair at a rate of greater than 52% (give a 2 pip spread) while keeping profit and loss points equidistant.


If you are trading one (1) naked pair, maybe. But, what happens when you trade multiple pairs, with varying spreads and varying PPV. You can actually lose more trades on individual pairs than you win, and still have enough profitability to overcome the "negative expectancy" theory.


Quoting FX-Petra
Quoting FX-Petra
Is there a system that can produce positive expectancy with equidistant profit/ loss points?


Of course, there is such a system - there are many such systems. The question is not whether or not such a system exists, the question is whether or not the trader is capable of researching, designing, engineering, building, testing, analyzing, verifying and then implementing and executing such a system for prolonged periods of time. That's the real question and the answer is an obvious, yes.

Can a trader grow $30 thousand to more than $80 million and not have positive expectancy?


Quoting FX-Petra
...
Quoting FX-Petra
Consider the following: You have a system that produces 60% win rate given equidistant profit loss points. How many trades must I enter to be 99.9% certain of a win? N= log(1-.999)/ log(1-.60). This yields N=7.5. This number tells us that every 1000 trades you will hit at least 1 stretch of at least 7 or 8 losers in a row--- even with an incredibly high win rate of 60%. Don’t be surprised when these losses happen, they will happen to a mathematical certainly of 99.9%.


You forgot to account for variable change across the board. You gave randomized black swans their due respect, but you never gave randomized "white swans" (my term) their respectful due. Why is it that we always take the absolute negative about trading and then pump it through a logarithmic calculation, to prove that the world is flat.

My system trades between 93% to 97% accuracy to a specified target. That means that at a minimum, 9.3 times out of 10, my system strikes its pre-designated target. You also forgot to account for Density. In my real world trading, I routinely see a fairly consistent pattern of high density probability (net positive trades) that stretches across a span of anywhere from a low of 23 trades to about 37 trades. I have seen stretches of positive outcomes as high as 47 trades, but that it not the statistical average range of positive outcomes.

Now, those are real world numbers that I just took from out of my system and I would suggest that they will vary greatly from the log calculation used above. So, when we talk about "mathematical certainty," one of things that is so crucial to good analysis, in order to obtain good results, is to make sure that your model is consistent with all the others that you are attempting to compare it to. The "certainty" aspect won't be so "certain."

Quoting FX-Petra
Some people make big money in forex. Absolutely some do. Some take accounts of $500 and turn that into $20,000 in a month. Some blackjack players take $500 and turn it into $20,000 in a few hours. Same for craps, roulette, etc. All these people are experiencing short term volatility in a positive way. It cannot be sustained and if they continue to trade or play for an extended period of time their account balance will be zero.


Absolutely, not true. How do you account for the many successful traders in the world? How do you account for people having sustained careers in the market as a trader for 10, 15, 20, 25, 30, 40+ years? You can't stick around that long if you are not producing positive results long-term. That should be common sense well understood.

Again, your model for probability will only be as good as the inputs you give it. If you believe that 60% trading accuracy is "acceptable" for such a model, then yes, you are going to get random walks back to negative volatility across smaller regions of both Time & Opportunity. But, if you can trade above the 90% threshold and to a specific target - then trading and positive expectancy become a breeze. And, you really don't need to be that high at all in your accuracy to be successful. Areas of negative volatility are not sitting on a timed clock at a specific location in the future, just waiting to explode onto the traders P/L statement. Negative volatility itself, is not invariant - it is not a fixed value within a probability measure. Yes, there will be black swans, but there will be white swans just as well to counter some or maybe even all of the effects of the negative volatility black swan.

We always focus on the black swans, but we completely forget about the white swans and their off-spring.


Quoting FX-Petra
Quoting FX-Petra
Conclusion. Please do not take this to mean I am a kill joy! I have traded forex for quite a few years and have had periods of great success, along with great disaster. I still trade from time to time, but I do it for fun, somewhat akin to casino gambling. If you are trading retail for any other reason that this, you will be disappointed. You may be successful for a few months or even years, but in the end if you trade long enough you will be wiped out.


This post makes no mathematical sense whatsoever. The treatise offered excludes the important factors that I mentioned above and for that reason, the underlying theory is flawed. More importantly, I've been in the business for 10 years now just about and got wiped out indeed, back when I did not know what on earth I was doing! That's what got me wiped out.

After learning what I was doing, I moved (all accounts recently) from out Retail and onto an Institutional platform. I started with $5k, lost it all. Used another $2.5k and lost it all. Then, I went back to school - Trading School. That means massive research, development, design, engineering, testing, analysis, verification and implementation. Today, I execute trades at a level that I always knew was possible and I am growing capital at a rate of nearly 25% per month.

My goal now is to make that 25% per week and then as close to 25% per day as I can get. My entire focus is now on one central question: How long will it take me to double this account? That's the challenge I wake up to every day, Monday through Friday. At this point, I don't even care anymore about Percent to double. I measure my success or failure at this point in Time to double. Sometimes, its a bit off. Some months, it drops to near 6%, but other months it climbs to near 47%. But, on average, its right in the neighborhood of about 25%.

I would suggest that you go back to Trader School, if you still want to be a successful trader. Nothing personal, or anything like that, but this business really does depend on how well you are able to defined your edge. And, quite frankly, that's going to take some serious outside the box thinking - as it would for anybody wanting to be really good at this business.

I had to go back to school and so do many people - so don't take that personally. Sometimes, we think we know it all, done it all, experienced it all and tried it all, but the truth of the matter is that your brain is capable of producing more good ideas than what you presently know, in this business. You have more creative and profitable ideas in you, but you will need to revisit Trader School to pull them to the surface. Some people just need to take some time off, like a year, and then come back with a fresh brain, new eyes and a burning desire to get the business up and running successfully.

I'm not saying anything new here, for those that have made it. They already know this. This business can be ruthless and it does not like to give up its inner workings easily. You have to work extremely hard for them and be willing to spend the requisite time unlocking their hidden treasures.

Getting outside the box, is my best advice to a post like this. Success exists, outside the box.
  • #354
  • Jun 27, 2011 12:15am Jun 27, 2011 12:15am
Dear JetTrader,

If you cannot understand how spotting the market 3 pips creates negative expectancy, I cannot help you. Hopefully, you have devised some method to overcome that built in disadvantage and turn your expectancy to positive. According to your post, you have. If that is the case, I congratulate you on your success. However, to paraphrase Mr. Greenspan, winners of coin toss tournaments seems quite proud of their skill. I have never put forth that there will be no winners in retail forex over the short run. There will be. Enjoy your success.

Regards,
  • #355
  • Aug 17, 2011 3:01am Aug 17, 2011 3:01am
Quoting Rise
... the many thousands of people who make their living from trading financial markets and have so for many many years are simple proof that this is so.
And where do you know that from?
  • #356
  • Aug 17, 2011 3:17am Aug 17, 2011 3:17am
Quoting pipmutt
I'm sure you'll understand if I decline your generous offer, there's no mileage in it for me as I don't really need confirming what I already know from practical experience.
LOL. Is this the answer that there is no such strategy???
  • #357
  • Aug 17, 2011 4:27am Aug 17, 2011 4:27am
I have seen in this thread several time trading compared to blackjack or even coin flip but I think that if you want to compare to a game the best comparison is poker (maybe that's why fund managers are often good poker players). The reason being that like in trading the human part is very important in poker.

First poker has also a slightly negative global expectancy as in casinos or online a little part of the money is taken by the casino so we could compare this to the spread. It is the price to pay to play in any game.
Then poker has clearly a random part as cards are dealt totally randomly.
But still the best players will win on the long run (but with quite much variance sometimes) as the skills prevails on the long run. (I hope nobody argues that the win are purely random and not based on skills as that has been checked not on a sample of 10 000 but on samples of 10s of millions hands)

I think that trading is very similar:
- slightly negative global expectancy because of spread and/or commissions
- a random element as many people act independently
- but not purely random because people see what other people do via the price movement (like poker player would see what other people do via their betting)
- Then similarly I think people who have a greater skill in interpreting the price movement will take the money of people having less skills.

I think we often forget that behind the market there are people, and that the trading game is to take money from other people pocket, it is not only a mathematical problem because people are far from being purely rationals and that's why people with the higher skills can win money as in any activity in life.
  • #358
  • Aug 17, 2011 4:40am Aug 17, 2011 4:40am
Quoting ThePipDoctor
This is why trading systems that exploit extended moves and extremely favourable risk reward ratios have stood the test of time.
That's what keeps us from quitting this pseudo business.
  • #359
  • Aug 17, 2011 4:42am Aug 17, 2011 4:42am
Quoting ThePipDoctor
they want the quick win or loss, since they cant handle being in a position for more than a few minutes
That's true. Golden words.
  • #360
  • Aug 17, 2011 4:46am Aug 17, 2011 4:46am
Quoting ThePipDoctor
3) Overtrading - The belief that more trades equals more profits (up to a point it does, but its a fine line)
true. more trades mean more small loses. Will the winners compensate them? Probably no.
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