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  • #161
  • Nov 9, 2015 9:54pm Nov 9, 2015 9:54pm
Quoting mike6789
No one has really hit the nail on the head here... When you GAMBLE (say, place 10 chips on the inside of a roulette table), you are expected to lose money determined by the odds of the game. The odds in gambling are ALWAYS NEGATIVE, ALWAYS. Let's say you want to randomly purchase positions on different currencies... the expectation is UNKNOWN. You are not expected to lose or win, it can go either way, and you can determine when to pull out... There is no possible way to make money gambling, the more you gamble, the more you lose, THIS IS MATH.
Mike and Hanover are right. At least, in my opinion, I define the difference between gambling and trading the same way. The key mathematical concept here is expectancy (also known as the expected value, or in trading, the expected return). No matter what you're doing, if your expected return is negative, then you're gambling; if it's positive, then you're not gambling. I'll start with a simple, concrete example:

Expected Return

If someone has one die and he says, "If you roll a 1 or a 2, you have to pay me $1. If you roll anything else, then I will pay you $1."... then I would definitely say "yes!" to this game. This is not gambling. There are only 6 possible outcomes of rolling the die 1, 2, 3, 4, 5, 6. And in four of these outcomes, I win $1. I lose $1 for only two of the possible outcomes. Even though I have no idea what number will come up when I roll the die once, I do know that in the long run (because of the law of large numbers), I will make money because I will win about 4 out of 6 times (or 2/3 of the time), and I will only lose about 2 out of 6 times (or 1/3 of the time) -- and in this case, the size of every winner and loser is the same.

If I played this game with Bill Gates, I would slowly take all of his money.

This is not gambling because I am "expected" to win, "expected" in the mathematical sense of the term. In other words, my expected return is positive.

Expected Return = (Average # of winning trades)*(Average size of a winner) - (Average # of losing trades)*(Average size of a loser)

In this example, on average, I will win 4 out of every set of six rolls of the die, and my average number of losing "trades" (or rolls of the die) is just 2. The average winner is $1, and the average loser is $1. Therefore my expected return is...

Expected Return = (4 wins)*($1 per win) - (2 losses)*($1 per loss) = $4 in total winnings - $2 in total losses = + $2 gain. I am expected to win $2 every time I play a set of six games, on average. Another way to look at this is, we could divide everything by 6 and get the average expected return per trade/roll:

Expected Return per Trade = (Percentage of winning trades)*(Average size of a winner) - (Percentage of of losing trades)*(Average size of a loser)

Expected Return per roll = (4/6)*($1) - (2/6)*($1) = (2/3)*($1) - (1/3)*($1) = $0.6666... - $0.3333... = $0.3333.... I am expected to make about 33 cents on average for each roll. Of course I will never make 33 cents on any roll; I'll either make a dollar or lose a dollar, but it averages out to a positive gain of 33 cents per roll. And because the expected return is positive, this is not gambling in my book.

Casinos

Not every game at the casino is gambling for every player. If you are betting money on red or black at the roulette table, then that is definitely gambling. Because of those one or two green zeroes, that slightly tips the edge in favour of the house. You will have a slightly negative expected return, and the house will have a slightly positive expected return. (Who wins in the long run? You're gambling. The casino is trading. Trading entertainment for money is their normal business, and they make thousands of trades every day with very slightly positive expected values.)

For a professional poker player, on the other hand, he is not really gambling (according to my definition). The very fact that a he came come back day after day and play poker for a living means that he is making money in the long run, and because he's making money, he must have a positive expected return, and therefore, he's not gambling. As the law of large numbers kicks in, he gradually "grinds out" and profits from his playing. Even though, just like with the die, he doesn't know exactly which cards will come up, he knows when to hold 'em, when to fold 'em, and -- most importantly for his edge -- he knows how to read other peoples expressions. He especially knows how to read the emotions of an amateur, and he knows all the kinds of mistakes amateurs make. This is what gives him his edge. All the amateurs at the table are gambling; the professionally poker player is trading.

Trading

The markets are the same: Either you're an amateur who is gradually (or quickly) losing money in the long run, in which case we could say you're gambling -- or you are a professional who is gradually making money in the long run. Just as you cannot be guaranteed exactly what number you will roll with a die, or exactly which cards will come up next in a poker game, you cannot be certain what will happen next in the markets. However, if you have some strategy/technique/system that gives you a positive expected return, then you know that your average winning trades are large and/or frequent enough to outweigh the relatively less frequent and/or smaller losses.

You can achieve a positive expected return in a few ways:

  1. You have many small wins that outweight your larger, but infrequently losses.
  2. Or you could have a few very large wins that outweigh many many small losses.
  3. Or, ideally, you'd have many large wins and losses that are very small and very infrequent.

If total gains > total losses, you're trading. If total gains < total losses, you're gambling. And if total gains = total losses, that's just free entertainment.

  • #162
  • Nov 9, 2015 10:07pm Nov 9, 2015 10:07pm
Trading

The markets are the same: Either you're an amateur who is gradually (or quickly) losing money in the long run, in which case we could say you're gambling -- or you are a professional who is gradually making money in the long run. Just as you cannot be guaranteed exactly what number you will roll with a die, or exactly which cards will come up next in a poker game, you cannot be certain what will happen next in the markets. However, if you have some strategy/technique/system that gives you a positive expected return, then you know that your average winning trades are large and/or frequent enough to outweigh the relatively less frequent and/or smaller losses.

agree
good words my friend,
  • #163
  • Nov 9, 2015 10:11pm Nov 9, 2015 10:11pm
Quoting mathematician
{quote} Mike and Hanover are right. At least, in my opinion, I define the difference between gambling and trading the same way. The key mathematical concept here is expectancy (also known as the expected value, or in trading, the expected return). No matter what you're doing, if your expected return is negative, then you're gambling; if it's positive, then you're not gambling. I'll start with a simple, concrete example: Expected Return If someone has one die and he says, "If you roll a 1 or a 2, you have to pay me $1. If you roll anything else,...
Nice post . Thanks for that. :-)
  • #164
  • Edited 10:37pm Nov 9, 2015 10:23pm | Edited 10:37pm
Quoting mathematician
{quote} Mike and Hanover are right. At least, in my opinion, I define the difference between gambling and trading the same way. The key mathematical concept here is expectancy (also known as the expected value, or in trading, the expected return). No matter what you're doing, if your expected return is negative, then you're gambling; if it's positive, then you're not gambling. I'll start with a simple, concrete example: Expected Return If someone has one die and he says, &quot;If you roll a 1 or a 2, you have to pay me $1. If you roll anything else,...
Correct but with one flaw. You need to know the future expectancy not historical expectancy of your strategy/technique/system. How do you go about determining that? Don't assume you know rather how do you know this future expectancy with certain degree of certainty,? I'm interested in this.
For me, people are dishonest even to themselves and we habitually lie. To overcome that put whatever strategy into codes to determine this historical expectancy. Even this approach can err and misleading becos of program quirks. So tell me, how do we accurately determine expectancy, historically at the least? Hopefully it repeats itself in the future somehow?
  • #165
  • Edited 10:52pm Nov 9, 2015 10:33pm | Edited 10:52pm
Some of these comments really are rich. The casino has an expected edge therefore nobody can achieve a different result. You think that all of these players at the local casinos go hour after hour time in and time out just to get their wallet cleaned and that only poker players make money. Do you think that (at least here in the southwest US (Vegas/ SoCal), the poker tables are not teaming with poker sharks that make casino edge look like a walk in the park? ok!

Because people live by statistical edge all of the time! Check out all your bro's who bought the 'how to absolutely wreck anything with snow on it' versus 'oh my! my math and statistics book say I should get my head handed to me doing this.' Do you think the mountain has a statistical edge over these skiiers? I bet they all end up dead. JUST DEAD!!!!

Inserted Video



Whatever party you math quants are going to next, I don't want to be there.

And this is the best part...

'I could never win at a casino at a simple table game, but I can profitably trade forex against Virtu Financial, Goldman Sachs, JP Morgan, every other investment bank, bank, hedge fund, CTA, corporate, CENTRAL BANK, my broker who is out to get me too!!!!, trader of all sorts because all my profits come from corporates and tourists exchanging currency!!!' That is rich.
  • #166
  • Nov 9, 2015 10:55pm Nov 9, 2015 10:55pm
lets see it in my own perspective,

in trading, you can see the whole history of its movement, even you can make notes for whatever decision you made for your on "history notes". So based on that information you can create a more better perspective of what happen next, that is trade.

but can you do that in roulette?, NO, you cannot do anything based on previous result because the wheel start from the scratch all over again, no history at all.

let me take an example, why you send your children to school?, because we can "see and hope" a better future after their graduate, get a better job for their own, at this point no one will call it gambling for our own children.

why did a company want to see your job application?, because they want to see your past, learn your history, want to know of what you did before, to take their decision about you, and if you are accepted, they will put hopes in you, that is trade.

the company will not just go out to the street with closed eyes and grab anyone passing and give him a job, NO, that is what i call gambling.

please, anyone that got my point, you can edit my poor english here, thanks.
  • #167
  • Edited 11:30pm Nov 9, 2015 11:03pm | Edited 11:30pm
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  • #168
  • Nov 9, 2015 11:17pm Nov 9, 2015 11:17pm
Quoting R19
Whatever party you math quants are going to next, I don't want to be there.
C'mon. The parties are fun!

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  • #169
  • Nov 9, 2015 11:24pm Nov 9, 2015 11:24pm
Quoting R19
https://www.youtube.com/watch?v=QqF4qXPD338
Nice video, thank you. The first 4 mins music is just too epic, it gives me chills
  • #170
  • Nov 9, 2015 11:42pm Nov 9, 2015 11:42pm
  •  Neio
  • Joined Oct 2012 | Status: Can't think outside?Enlarge the box | 688 Posts
Quoting dimmerpixel
lets see it in my own perspective, in trading, you can see the whole history of its movement, even you can make notes for whatever decision you made for your on "history notes". So based on that information you can create a more better perspective of what happen next, that is trade. but can you do that in roulette?, NO, you cannot do anything based on previous result because the wheel start from the scratch all over again, no history at all. let me take an example, why you send your children to school?, because we can "see and hope" a better future...


I like your analogies. In some ways you could say that they have a predetermined future because you send your kids to school and you expect that they will take exams and get grades at the end of it, which you then expect them to use to get a job. I mean why do people pay to send their kids to University? In the expectation that they will come out better qualified to get higher paying jobs. Again not guaranteed of course as life can take a different turn based on external influences and choices the kid makes even on a daily basis. Conversely if somebody starts abusing drugs you can start to expect that they will have a shorter life expectancy and is likely to get mixed up in all kinds of trouble (losing a job, stealing, etc) unless they change their ways.

Same with trading we can see how things have played out in the past. We know how price movement works. We should know when to trade and more importantly when NOT to trade. For example we can see that if we want to capture a lot of pips from strong directional moves it is probably best to stay out of the Asian session and wait for London and NY. Basic trading knowledge tells us that. Zooming in a bit more, if you are aiming to capture intraday trending moves then it is also possible to determine when it is best to stay out. To know when NOT to trade while you wait for price to show its hand.

Regards

Neio
An expert is a man who has made all the mistakes which can be made
  • #171
  • Nov 10, 2015 1:33am Nov 10, 2015 1:33am
Should be some big time traders on here. Evaluate this baccarat system. I absolutely have found what they say about game characteristics and how you have to adjust your play:

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  • #172
  • Nov 10, 2015 2:04am Nov 10, 2015 2:04am
Quoting skyway
{quote} Correct but with one flaw. You need to know the future expectancy not historical expectancy of your strategy/technique/system. How do you go about determining that? Don't assume you know rather how do you know this future expectancy with certain degree of certainty,? I'm interested in this. For me, people are dishonest even to themselves and we habitually lie. To overcome that put whatever strategy into codes to determine this historical expectancy. Even this approach can err and misleading becos of program quirks. So tell me, how do we...
Yes, you're right: Ideally, you'd be able to know the future expectancy. Now with something like the dice game I mentioned, you know the future expectancy because you know that the probability of rolling 4 out of 6 of the numbers on a die is exactly 4 out of 6, and that never changes. But with trading, if you calculate the probability of a winning trade, the probability of a losing trade, and the average size of a winner and of a loser, then this is all just past information, and you hope that those percentages and averages hold up in the future as well. But you're right, these numbers could change.

However, that is why you must base your calculations/testing off of a large amount of data. You want to know how your strategy works in a variety of different market environment (through up trends, down trends, ranges, etc.). But I know what you're thinking: Even if you do all this testing, the market could change! That is true, but that's why it is better to have a simple system. If you have a complex system with many variables and inputs, then it's far too easy for the market to change in a way that ruins the delicate balance between all of these inputs. However, if you have a very simple system that only depends on a few inputs, then it's much more robust, and it is less likely that the market could change in a way that would destroy your edge.

For example, consider a complex strategy like this: I only buy EUR/USD when the US economy has been in a decline for at least 3 quarters, when at least 3 of the 5 economies of Germany, France, Italy, Spain, and the Netherlands have been rising for 3 quarters, when the inflation of the US is at least 50% higher than the inflation in Germany, and when the 50-day SMA crosses above the 100-day SMA on the EUR/USD, and the MACD(26,13,3) is oversold... Or something like that.

As you can imagine, it wouldn't take long for something to change in one of those countries involved or in the EUR/USD market to ruin the delicate balance between all of these variables. Even if this strategy was tested with a lot of data, chances are that the designer of such a system has done what they call "curve fitting", i.e. he or she has calibrated the inputs (like the number of periods for the SMAs or the MACD or the inflation ratio, etc.) to very specific settings that make it work exceptionally well over the period of data that they had to work with, but there's no guarantee that this complex relationship will hold in the future.

Compare that to a strategy such as: I only buy when price has made lower lows for 5 consecutive hours with a total drop of at least 150 pips. I use a stop of 25 pips and target 50 pips... Or something like that. As you can see, this is a much more robust strategy and it is based on a sound principle: If price has made a large move in one direction, then the people who have profited from it will be looking to take their profits, so some retracement is likely as they compete to take their profits.

Just to be clear: I'm not claiming that either of these strategies works or doesn't work. I just made them up for the sake of argument. One thing to keep in mind is reward-to-risk ratio. When your reward-to-risk is greater than 1, then you can profit even if less than 50% of your trades are winners. In the second example, the reward-to-risk is 2:1, so that strategy just needs to be correct slightly greater than 33.3% of the time to be profitable.
  • #173
  • Nov 10, 2015 2:10am Nov 10, 2015 2:10am
Quoting skyway
{quote} ... So tell me, how do we accurately determine expectancy, historically at the least? Hopefully it repeats itself in the future somehow?
Actually, it's very easy to calculate the expectancy based on your historical results. You could take all your trades, divide them into winners and losers, figure out the percentage that are winners, the percentage that are losers, and calculate the average size of the winners and the average size of the losers, but there's a much easier way:

Expected Return is mathematically equivalent to the average profit per trade. So it's very easy to calculate: Just take your total profit over a certain period and divide by the number of trades.

Of course, this expected return is only positive if your total profit is positive. Which is why some people here have said you're gambling if you're losing money and you're trading if you're making money. It's true!
  • #174
  • Nov 10, 2015 2:14am Nov 10, 2015 2:14am
Trading systems developers should know that there is a difference between back testing and running a system live.

Many of the gaming approach developers I am looking at state that testing an approach on a computerized gaming simulation does not reflect actual gaming conditions.
  • #175
  • Nov 10, 2015 2:21am Nov 10, 2015 2:21am
Quoting dimmerpixel
lets see it in my own perspective, in trading, you can see the whole history of its movement, even you can make notes for whatever decision you made for your on "history notes". So based on that information you can create a more better perspective of what happen next, that is trade. but can you do that in roulette?, NO, you cannot do anything based on previous result because the wheel start from the scratch all over again, no history at all. let me take an example, why you send your children to school?, because we can "see and hope" a better future...
You've made some good points!

Sure, I'll edit your English:

From my own perspective, in trading, you can see the whole history of its movement. You can even take notes on every decision you made as part of your own trade journal. So based on that information, you can create a better perspective of what might happen next. But can you do that in roulette? NO, you cannot do anything based on the previous results because the wheel starts from the scratch every time. Each spin of the roulette wheel is independent of past spins. Let me make an example: Why do you send your children to school? You do it because you can imagine a better future for your children after they graduate, such as getting a better job. In this respect, no one would say that what you're gambling with your children's future. Why do companies want to see your job application? ... because they want to see your past and learn your history. They want to know about what you did before so they can make a better decision about you, and if you are accepted, they will put trust in you. That is trading. The company will not just go out on the street with their eyes closed and grab the next random person passing by and give him a job. NO, that is what I call gambling. please, anyone that got my point, you can edit my poor english here, thanks. <-- That sentence was perfect. lol
  • #176
  • Nov 10, 2015 2:26am Nov 10, 2015 2:26am
Quoting R19
Trading systems developers should know that there is a difference between back testing and running a system live. Many of the gaming approach developers I am looking at state that testing an approach on a computerized gaming simulation does not reflect actual gaming conditions.
That's true. Backtesting does not guarantee future, live trading success. However, if a strategy does work well in live trading, then it will also work well in back-testing.
  • #177
  • Nov 10, 2015 2:28am Nov 10, 2015 2:28am
To expand, the NOR Baccarat players speak about how they don't simulate. Everything they're evolving with is based on live play. I figure most development groups worth anything would have a similar view.
  • #178
  • Nov 10, 2015 2:36am Nov 10, 2015 2:36am
Quoting R19
Some of these comments really are rich. The casino has an expected edge therefore nobody can achieve a different result. You think that all of these players at the local casinos go hour after hour time in and time out just to get their wallet cleaned and that only poker players make money. Do you think that (at least here in the southwest US (Vegas/ SoCal), the poker tables are not teaming with poker sharks that make casino edge look like a walk in the park? ok! ...
Actually, yes, some people are idiots and they keep going back to gambling again and again even though they keep losing money. Just look at all the people who waste money every single day on scratch tickets.

Furthermore, the casino or a professional poker player doesn't have to make their money by taking money from the same players each time. They can make money just as well if there is a steady stream of different losers coming in each day. And that's what they do. Similarly, there is a steady stream of amateur traders joining the markets every day, and the professionals are there to take their money.

And finally, actually a casino will kick out a player if they think the player is counting cards or doing something else that the casino thinks will give that player a positive expectancy. That is because those players will be taking away from the casino's profits. And the casino has every right to kick them out; it's a private club!
  • #179
  • Nov 10, 2015 2:38am Nov 10, 2015 2:38am
Quoting R19
To expand, the NOR Baccarat players speak about how they don't simulate. Everything they're evolving with is based on live play. I figure most development groups worth anything would have a similar view.
True. It's better to work with real, live results. You certainly don't want to backtest on simulated data. You don't even have to backtest at all. You could just trade live and keep track of how you're doing. I guess we could call that live testing.
  • #180
  • Nov 10, 2015 8:43am Nov 10, 2015 8:43am
I believe that the thing you ask about is some kind of invisible line between the possibility to handle emotions and the impossibility of it, as well as the purpose of market entering: do you really know when exactly to enter the market to get profit in accordance with your strategy, or you mostly want to give up for a loss and mostly hope that know for sure.
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