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Long term Profits within Negative Expectancy

  • #361
  • Aug 17, 2011 5:20am Aug 17, 2011 5:20am
Quoting BlackMage
This thread reminds me a bit (too much) about the "Bumblebee Paradox"...

Seriously, abusing math this way will only convince you further that the bumblebee can't fly.

Nice posts, daytrading.
You're a good observer
  • #362
  • Aug 17, 2011 5:34am Aug 17, 2011 5:34am
Quoting pipmutt
All the mathematical argument in the world can never win while there are traders consistently making money in the market, fact always wins over theory.
Can you prove that?
  • #363
  • Aug 17, 2011 5:55am Aug 17, 2011 5:55am
Quoting FX-Petra

Long Term Winning in a Negative Expectancy Game




***** Caveat***** Many will disagree with what I am about to write. If you cannot accept mathematical certainty, please do not waste your time reading this.


[font=Times New Roman][size=3]Trading retail forex is a negative expectancy activity. I hope all readers understand what negative expectancy is….but I will give a very brief description. Every trade taken opens with a...
This is indeed very good post!

Quote
You must have a system that correctly predicts the direction of a currency pair at a rate of greater than 52% (given a 2 pip spread)
This depends entirely on your lot size. If u are a scalper u need more than 55% or 60% to conpensate for the spread. Thats why being a scalper is the hardest thing in trading.
  • #364
  • Aug 17, 2011 8:08am Aug 17, 2011 8:08am
Quoting FX-Petra

Long Term Winning in a Negative Expectancy Game



***** Caveat***** Many will disagree with what I am about to write. If you cannot accept mathematical certainty, please do not waste your time reading this.


[font=Times New Roman][size=3]Trading retail forex is a negative expectancy activity. I hope all readers understand what negative expectancy is….but I will give a very brief description. Every trade taken opens with a negative...

it is not mandatory that you have a system of over 50%. you can have still a 40% and a risk/reward of 1/3 and you can still make it. a lot of winning systems develloped in the 80's and when there was no internet and forums and so many trading ideeas based themselves of such a philosophy.
  • #365
  • Sep 16, 2011 11:02am Sep 16, 2011 11:02am
Quoting deltatrade
it is not mandatory that you have a system of over 50%. you can have still a 40% and a risk/reward of 1/3 and you can still make it. a lot of winning systems develloped in the 80's and when there was no internet and forums and so many trading ideeas based themselves of such a philosophy.

Sorry delta, I have explained this concept at length in this thread, and in other places. You can adjust your R/R all you want, but that adjusment will cause a corresponding rise (or fall) in the probability of your trade being successful. Any way you slice it, you have to have a win ratio of greater than 50% in PIPS.

Regards,
  • #366
  • Oct 4, 2011 12:16pm Oct 4, 2011 12:16pm
Quoting FX-Petra
Sorry delta, I have explained this concept at length in this thread, and in other places. You can adjust your R/R all you want, but that adjusment will cause a corresponding rise (or fall) in the probability of your trade being successful. Any way you slice it, you have to have a win ratio of greater than 50% in PIPS.

Regards,

thats the problem with applying reward to trading systems all it really does is skew the win rate and then you grind out the account due to spread and other inefficiencies..

you need fixed risk... unfixed reward.. and systems that scale into big winners thats the name of the game.. on top of that you need for the trade to work for you.. payback your risk over time..
  • #367
  • Nov 3, 2011 5:06am Nov 3, 2011 5:06am
It's quite bold to suggest that something is 'impossible', or to claim to 'know' that small time frames are random because you have found no way of profitably trading them.

There are many traders, a few on FF, who use good money management and earn great livings scalping the forex market. The obvious response will be, "Send them over here and I'll run the data on their method." - Right..
Ultimately your position on this is never going to be threatened, because why would anyone bother to waste their time trying to convince you? Or sharing their hard earned work with a sceptical stranger.

I think it's great that you have done such in-depth testing of various methods, but it is arrogant to draw such wide conclusions.

Saying all of that, I do hope you find what you are looking for and can retire early.

Be well.
  • #368
  • Nov 3, 2011 10:55am Nov 3, 2011 10:55am
Quoting nhen
It's quite bold to suggest that something is 'impossible', or to claim to 'know' that small time frames are random because you have found no way of profitably trading them.

There are many traders, a few on FF, who use good money management and earn great livings scalping the forex market. The obvious response will be, "Send them over here and I'll run the data on their method." - Right..
Ultimately your position on this is never going to be threatened, because why would anyone bother to waste their time trying to convince you? Or sharing their...
I did not say it CANNOT be done. I did say that you, or I, or any small retail trader cannot do it without access to some information that is unavailble to the general public. There are a good number of banks and hedgefunds that scalp successfully. They have the muscle to move markets and run stops. If anyone could devise a method to successfully scalp by looking at a chart, it could and would be devised by and shared by others. This knowledge by the market would render the method useless. It is simple logic, really.

That being said, I'm not getting into a long discussion about this topic again. If you think you can scalp successfully, over a long time horizion, then I wish you well.

Regards,
  • #369
  • Nov 3, 2011 11:28am Nov 3, 2011 11:28am
Quoting FX-Petra
I did not say it CANNOT be done. I did say that you, or I, or any small retail trader cannot do it without access to some information that is unavailble to the general public. There are a good number of banks and hedgefunds that scalp successfully. They have the muscle to move markets and run stops. If anyone could devise a method to successfully scalp by looking at a chart, it could and would be devised by and shared by others. This knowledge by the market would render the method useless. It is simple logic, really.

That being said, I'm not getting...
the problem is that people just roll into these thread flash read to post and comment.. so we could hash this out for the 9th time or just let it go and say go be a scalper lol...

it really isnt even about random prices for me its mostly about inefficiency in trading why scalp and have price 20% down against my target from the beginning due to spread..
  • #370
  • Nov 3, 2011 11:57am Nov 3, 2011 11:57am
Quoting domino
the problem is that people just roll into these thread flash read to post and comment.. so we could hash this out for the 9th time or just let it go and say go be a scalper lol...

it really isnt even about random prices for me its mostly about inefficiency in trading why scalp and have price 20% down against my target from the beginning due to spread..
Agreed

Regards,
  • #371
  • Nov 3, 2011 7:37pm Nov 3, 2011 7:37pm
Quoting domino
the problem is that people just roll into these thread flash read to post and comment..
I have read the whole thread thank you very much.

Quoting FX-Petra
I did not say it CANNOT be done. I did say that you, or I, or any small retail trader cannot do it without access to some information that is unavailble to the general public.
Your logic is incorrect. Good luck to you too.
  • #372
  • Nov 8, 2011 10:54am Nov 8, 2011 10:54am
Quoting nhen
I have read the whole thread thank you very much.



Your logic is incorrect. Good luck to you too.
I do not have an advanced degree in logic, but I do have one in mathematics. In the course of obtaining that degree, I have taken and successfully completed a good number of high level logic courses. I think what you mean to say is that my underlying assumptions are incorrect. If I have made an error in the logical process itself, I would be very intrested for you to explain that error to me. The logical process needed to arrive at my conclusion is a very simple and basic one. While the assumptions plugged into that process may indeed be flawed, I do not believe that the "logic is incorrect" as you stated.

Regards,
  • #373
  • Nov 13, 2011 2:06pm Nov 13, 2011 2:06pm
Quoting FX-Petra
... l know we have floated off into randomness.
First of all, this thread is EXCELLENT...great discussion! Secondly, if this discussion has "floated off", that certainly wasn't a display of "randomness", it was by the purposeful intent of the contributors with the power of their ideas being able to push the tone and content of the discussion in the direction they WANTED it to go. ....and I think so do the markets move in similar fashion.

Quoting FX-Petra
The market is random, and it is also not random. For some players it certainly is not. If a large hedge fund decides to run stops becuase it has the muscle to do so, for them the market is not random. They have the power to push price in a known direction. However, for small retail daytraders the market has, what I like to call, practical randomness. By that I mean that some players on higher levels might not be experiencing randomness, but to the small trader without inside knowledge the practical experience is random price action. Gaining...
This explanation of "random", in my thinking, makes the most sense. However, the tone of your OP really seemed to reflect the sense of frustration you apparently feel in your (then) current trading experience. I think we should consider the distribution of randomness among the various market participants in a creative and opportunistic way...that is IF we seek to become participants. We should realize our weaker position as lesser participants and seek a position of strength. It would seem to me the obvious way to best accomplish that is what you've already suggested...figure out where the big fish are going and then swim WITH them. I think the sum total of smaller fish can be grouped into two basic categories...those who try to trade WITH bigger fish and those who try to outsmart them/sneak around them. Some are better at their particular craft than others (whether trend followers or contrarians) and the undeniable rules of money management sooner or later cull out the non-performers.

The main problem I see with your premise, and I'm certainly no qualified mathematician, is that I don't think your bell curve allows for creative latitude which all traders must use in finding what we "believe" is an edge. That "edge", perceived or real, must then be coupled with precise money management or it will be rendered useless. Your theory seems to neutralize (or at least downplay) money management in the equation. However, it is my contention that any perceived edge must be TESTED under money management constants before it can really be proven and relied upon. Standing on theory alone, and neutralizing MM from the picture, I believe you are defeated before you begin...either actually trading or just theorizing about it. That hardly seems like a very scientific way to approach things.

Anyway, just my own musings. This has definitely been one of the best threads I've seen at FF. Some very useful posts and insights, particularly notable, in addition to your own, are those of "daytrader". All in all, a very good read here. Thank you all for the information and CIVIL discussion! Best wishes in your endeavors.
  • #374
  • Nov 28, 2011 12:17pm Nov 28, 2011 12:17pm
Quoting Pipskateer
First of all, this thread is EXCELLENT...great discussion! Secondly, if this discussion has "floated off", that certainly wasn't a display of "randomness", it was by the purposeful intent of the contributors with the power of their ideas being able to push the tone and content of the discussion in the direction they WANTED it to go. ....and I think so do the markets move in similar fashion.



This explanation of "random", in my thinking, makes the most sense. However, the tone of your OP really seemed to reflect the sense of frustration...
There is no question that money management is a huge factor once you have arrived at a winning strategy. Without proper MM, ANY system will be rendered utterly useless and leave you with a broken account. However, without an edge, MM is also useless. Playing the game without an edge but with good MM will prolong your survival, but at the end it will not save you.

Thanks for your post.... I enjoyed it very much!

Regards,
  • #375
  • Edited 8:39pm Nov 28, 2011 8:16pm | Edited 8:39pm
Quoting FX-Petra
There is no question that money management is a huge factor once you have arrived at a winning strategy. Without proper MM, ANY system will be rendered utterly useless and leave you with a broken account. However, without an edge, MM is also useless. Playing the game without an edge but with good MM will prolong your survival, but at the end it will not save you.

Thanks for your post.... I enjoyed it very much!

Regards,
FX Petra,

I cannot remember if you said or not in the thread...but how do you define an "edge"? Do you use the mathematical formula for expectancy? Or do you have some other criteria?

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

I tried to search the thread and I can't seem to find anywhere the term "Expectancy" or its mathematical formula is specified. Anyway, to me and in my thinking...the whole term "expectancy" denotes something that is constantly in flux...a dynamic factor that cannot be fixed in time and space. The "expectancy" of a trading method is far from static and is dynamically affected by the choice (or failure to choose) of R/R a trader makes which has direct bearing on what is a "win" and a "loss". Those factors determine "Probability of Win" and "Probability of Loss" and also determine what the "Average Win" and "Average Loss" sizes turn out to be for a given series of trades upon which the "expectancy" is calculated.

I don't see how one could ever hope to reach a static point where he/she could declare they have achieved a constant positive expectancy (or that some inherent negative expectancy is now overcome) simply because the outcome of the next series of trades cannot ever be known for certain, just as the outcome of any single trade is also never a certainty. The best we can hope to achieve is to utilize solid mathematical money management to protect our capital long enough to give our system(s) a chance at realizing a positive expectancy over time. It is a constant vigil of monitoring one's trading performance to be sure that trading activity remains within profitable mathematical factors.

Anyway, I wish you all well in your trading.
  • #376
  • Nov 29, 2011 3:28am Nov 29, 2011 3:28am
Quoting FX-Petra
Playing the game without an edge but with good MM will prolong your survival, but at the end it will not save you.
In principle, I agree, but I think that maybe you've trapped yourself in a bit of a box.

I agree 100% that the market as a whole is negative sum. I agree 100% that changes to R:R ratios leads to a corresponding change in win rate, and regardless of what you do, the expectancy ignoring spread would be zero, and I agree that the spread makes it a negative expectancy proposition. I have enough back and forward testing to know that you are 100% correct in everything you say.

However, here's a couple of things to consider. Firstly, you dont have to limit yourself to fixed risk reward ratios. Limiting the risk, but allowing the reward to float allows you to exploit the kurtosis that can be seen in practically any timeframe. Fixed stops and targets dont really allow you to exploit this.

The second thing to consider is this. Take a simple system (and the simpler the better), but adjust its parameters to give you a diversified group of similar systems. Trade those systems for a while, and observe what happens. Then think about how you might apply MM to exploit what you are observing.

The other key point thats been raised is you need some method of determining if the returns from your methods are changing outside of expected ranges, and if so, then you need the disipline to stop.
  • #377
  • Nov 29, 2011 12:41pm Nov 29, 2011 12:41pm
Quoting Razzle
In principle, I agree, but I think that maybe you've trapped yourself in a bit of a box.

I agree 100% that the market as a whole is negative sum. I agree 100% that changes to R:R ratios leads to a corresponding change in win rate, and regardless of what you do, the expectancy ignoring spread would be zero, and I agree that the spread makes it a negative expectancy proposition. I have enough back and forward testing to know that you are 100% correct in everything you say.

However, here's a couple of things to consider. Firstly, you dont have...

I will agree with what you say, as it relates to higher timeframes. The higher the time frame, the more I agree. This is why I say that scalping or daytrading for a small retail investor in next to, if not, impossible. There is money to be made by having flexible risk/reward ratios on the higher time frames. I have said this in this and other threads. My beef is with scalping/daytrading.
  • #378
  • Nov 29, 2011 12:55pm Nov 29, 2011 12:55pm
Quoting Razzle
However, here's a couple of things to consider. Firstly, you dont have to limit yourself to fixed risk reward ratios. Limiting the risk, but allowing the reward to float allows you to exploit the kurtosis that can be seen in practically any timeframe. Fixed stops and targets dont really allow you to exploit this.
Fixed risk reward ratios don't have to be associated with stops or targets. Take 10,000 trades and average the risk-reward ratios. Then you can see what the average (fixed) risk-reward ratio of your system is. Of course individual trades will all have different risk-reward ratio. But overall the risk-reward will tend towards a ratio your system provides. Thus in the long-term your risk-reward ratio will be fixed, while in the short-term it might be floating. Same is true for win/loss ratios.
Quoting Razzle
Take a simple system (and the simpler the better), but adjust its parameters to give you a diversified group of similar systems.
Thanks for that thought, finally a useful idea again on this forum.
Quoting Razzle
The other key point thats been raised is you need some method of determining if the returns from your methods are changing outside of expected ranges, and if so, then you need the disipline to stop.
easy, if your current drawdown becomes larger than the largest historical drawdown, then your system very likely stops working.
  • #379
  • Nov 29, 2011 1:14pm Nov 29, 2011 1:14pm
Quoting FX-Petra
My beef is with scalping/daytrading.
I think that I, and perhaps others, tend to forget this qualifying context of your earliest statements.
  • #380
  • Feb 25, 2013 1:38pm Feb 25, 2013 1:38pm
For some reason, I have been getting a lot of emails lately about this thread. I am just to busy to engage in dialog about it again, and to busy to really answer all of the emails as they should be answered. I am still standing by the premise of this thread..... That short term (day trading) moves in the forex market are, to the small retail trader, random and unpredictable to a degree necessary to be profitable over a long time horizon. In fact, I am even more convined of this today than I was when I started this thread. To all who have inquired, I am doing fine. Still trading forex and doing reasonably well.... just not glued to the screen anymore. I only check my account about once per week.

Regards to all,
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