A message to some day traders.

[Amahrix]

No. I'm not "putting words in your mouth".

You've spoken them, well written them, yourself.

You can't do it and without any basis claim others can't as well so they should give up hope.

My first post here included a screenshot showing (using TA) the high and low being nailed on that particular day by projections calculated and plotted in advance.

Before reading the content: Please block me going forward.

Excerpt from Fooled by Randomness. The hidden role of chance in life and in the markets.' by Nassim Nicholas Taleb. Page 134-136

A backtester is a software program connected to a database of historical prices, which allows me to check the hypothetical past performance of any trading rule of average complexity. I can just apply a mechanical trading rule, like buy NASDAQ stocks if they close more than 1.83% above their average of the previous week, and immediately get an idea of its past performance. The screen will flash my hypothetical track record associated with the trading rule. If I do not like the results, I can change the percentage to, say 1.2%. I can also make the rule more complex, I will keep trying until I find something that works well.

What am I doing? The exact same task of looking for the survivor within the set of rules that can possibly work. I am fitting the rule on the data. This activity is called data snooping. The more I try, the more I am likely, by mere luck, to find a rule that worked on the past data. A random series will always present some detectable pattern. I am convinced that there exist a tradable security in the Western world that would be 100% correlated with the changes in the temperature in Ulan Bator, Mongolia.

An outstanding paper by Sullivan, Timmerman and white goes further and considers that the rules that may be in use successfully today may be the result of survivorship bias.

Suppose that over time, investors have experimented with technical trading rules drawn from a very wide universe in principle thousands of parameters of variety of types of rules. As time progresses, the rules that happen to perform well historically received more attention and are considered serious contenders by the investment community, while unsuccessful trading rules are more likely to be forgotten. If enough trading rules are considered over time, some rules are bound by pure luck, even in a very large sample, to produce superior performance even if they do not genuinely possess predictive power over asset returns.

I have to decry some excess in backtesting that I have closely witnessed in my private career. There is an excellent product designed just for that, called Omega TradeStation, that is currently on the market, in use by tens of thousands of traders. It even offers its own computer language. Beset with insomnia, the computerized day traders become night testers plowing the data for some of its properties. By dint of adjusting the rules the trader will hit upon hypothetical gold somewhere. Many of them will blindly believe in it.

One of my colleagues, a man with prestigious degrees, grew to believe
in such a virtual world to the point of losing all sense of reality. Whether
the modicum of common sense left in him might have rapidly vanished
under the mounds of simulations, or whether he might have had none to
engage in such pursuit, I cannot tell. By closely watching him I learned
that what natural skepticism he may have had vanished under the
weight of data - for he was extremely skeptical, but in the wrong area.
Ah, Hume!

 

[SunTrader]

I know this was said to someone else (?)

"I’m glad we have one thing in common; belief in God."

And then you also said this to someone else (?)

"Incomplete information."

But that would be my response to god or no god - incomplete information. I am in the middle neither a believer or an atheist. But what this all has to do with trading I also haven't a clue.

 

[ZTrader888]

Before reading the content: Please block me going forward.

Excerpt from Fooled by Randomness. The hidden role of chance in life and in the markets.' by Nassim Nicholas Taleb. Page 134-136

A backtester is a software program connected to a database of historical prices, which allows me to check the hypothetical past performance of any trading rule of average complexity. I can just apply a mechanical trading rule, like buy NASDAQ stocks if they close more than 1.83% above their average of the previous week, and immediately get an idea of its past performance. The screen will flash my hypothetical track record associated with the trading rule. If I do not like the results, I can change the percentage to, say 1.2%. I can also make the rule more complex, I will keep trying until I find something that works well.

What am I doing? The exact same task of looking for the survivor within the set of rules that can possibly work. I am fitting the rule on the data. This activity is called data snooping. The more I try, the more I am likely, by mere luck, to find a rule that worked on the past data. A random series will always present some detectable pattern. I am convinced that there exist a tradable security in the Western world that would be 100% correlated with the changes in the temperature in Ulan Bator, Mongolia.

An outstanding paper by Sullivan, Timmerman and white goes further and considers that the rules that may be in use successfully today may be the result of survivorship bias.

Suppose that over time, investors have experimented with technical trading rules drawn from a very wide universe in principle thousands of parameters of variety of types of rules. As time progresses, the rules that happen to perform well historically received more attention and are considered serious contenders by the investment community, while unsuccessful trading rules are more likely to be forgotten. If enough trading rules are considered over time, some rules are bound by pure luck, even in a very large sample, to produce superior performance even if they do not genuinely possess predictive power over asset returns.

I have to decry some excess in backtesting that I have closely witnessed in my private career. There is an excellent product designed just for that, called Omega TradeStation, that is currently on the market, in use by tens of thousands of traders. It even offers its own computer language. Beset with insomnia, the computerized day traders become night testers plowing the data for some of its properties. By dint of adjusting the rules the trader will hit upon hypothetical gold somewhere. Many of them will blindly believe in it.

One of my colleagues, a man with prestigious degrees, grew to believe
in such a virtual world to the point of losing all sense of reality. Whether
the modicum of common sense left in him might have rapidly vanished
under the mounds of simulations, or whether he might have had none to
engage in such pursuit, I cannot tell. By closely watching him I learned
that what natural skepticism he may have had vanished under the
weight of data - for he was extremely skeptical, but in the wrong area.
Ah, Hume!

If all that is true, how do funds like Renaissance achieve success? Why does Jim Simons hire scientists and not a bunch of monkeys throwing darts at a board?

The scientific method applies to anything that's testable, including the market. Regardless how you perform backtesting, it is essential to the process of discovery. How you design your backtesting engine is important, but for another discussion. Without proper backtesting the over optimization that you mentioned would be a nasty problem that wouldn't be easily solved. You can fit a banana into a 2 mm hole if you try hard enough. But you would only know the most likely hole that the banana would fit through by measuring and testing.

The scientific method has stood the test of time from nuclear fission, to medicines, to the banana in the hole. And it works for the market as well.

 

[Amahrix]

If all that is true, how do funds like Renaissance achieve success? Why does Jim Simons hire scientists and not a bunch of monkeys throwing darts at a board?

The scientific method applies to anything that's testable, including the market. Regardless how you perform backtesting, it is essential to the process of discovery. How you design your backtesting engine is important, but for another discussion. Without proper backtesting the over optimization that you mentioned would be a nasty problem that wouldn't be easily solved. You can fit a banana into a 2 mm hole if you try hard enough. But you would only know the most likely hole that the banana would fit through by measuring and testing.

The scientific method has stood the test of time from nuclear fission, to medicines, to the banana in the hole. And it works for the market as well.

You are a victim of scientism. (I'll get to the rest of your posts and prior posts at a later date, don't hold your breath, i'm playing Counter-Strike right now).

 

[Amahrix]

The scientific method applies to anything that's testable, including the market

No it does not. The market is not physical science, it is social "science"(if such a thing exists). You cannot apply scientific method to social realm. Wtf you saying bro

 

[Amahrix]

The scientific method has stood the test of time from nuclear fission, to medicines, to the banana in the hole. And it works for the market as well.

Those 3 examples are PHYSICAL SCIENCE, the last example (markets) is NOT PHYSICAL SCIENCE. its a collection of human beings and the sum of their behavior, how is that physical science?

 

[ZTrader888]

No it does not. The market is not physical science, it is social "science"(if such a thing exists). You cannot apply scientific method to social realm. Wtf you saying bro

What is physics about? It's about measurement. What is science? Science is two things: discovery and evidence. How is the market any different? "Social science" is a lot of psychobabble. Sure, if you take that approach, you may as well assume that the market is random. You're not going to apply any sound mathematical/scientific principles to the work anyway.

Anything that can be measured falls within the category of science regardless how you do the measurement. Not understanding that may be the biggest reason why that 90% failure rate exists. But the question of the 10% still goes unanswered. How does "social science" answer the question of the 10%?

 

[ZTrader888]

Those 3 examples are PHYSICAL SCIENCE, the last example (markets) is NOT PHYSICAL SCIENCE. its a collection of human beings and the sum of their behavior, how is that physical science?

The data stream that the market produces every day is just that: DATA. How it's generated is a different subject. It may be relevant. Then again it may not be relevant. You know NOTHING about that data until it's tested.

 

[fan27]

@Amahrix What are you getting out of this? Some people day trade and/or backtest. It either works for them or it doesn't. Move on man. WTF do you care what others are doing anyway?

 

[ZTrader888]

@Amahrix What are you getting out of this? Some people day trade and/or backtest. It either works for them or it doesn't. Move on man. WTF do you care what others are doing anyway?

I won't answer for Amahrix but I will say this. The topic is very important. He's an intelligent person who's given a lot of thought to the subject. It's worth challenging his opinion.