Fooled by Taleb

[jem]

Quote from Visaria:

nadal and federer were knocked out v early on. the guys who beat them, luck or skill?

in any knockout tournament, there is an element of luck.

This is my point...

if anyone were to call a victory over a non injured Federer or Nadal luck I posit that they have been fooled by Taleb or fooled by fooled by randomness.

Just because the points in a match have binary results does not mean they are like coin flips. Randomness could never string together so many points that luck could beat Federer or Nadal.

 

[Maverick74]

Quote from hitchslap:

There's no doubt that certain people who make consistently huge profits haven't done so out of luck!
They've got access to information that only some are privy too, or they have a technological advantage etc etc..

The question of luck only seems to come up when we are talking of retail traders who are basing their trading decisions from charts.

JPMorgan didn't have a losing day in the whole quarter ending 31st march. They're not lucky...

Actually not true. You just got fooled. In their entire trading department among the thousands of traders they took all kinds of loss every single day of the quarter. But on the aggregate, their "firm wide" p&l was positive. If you had to go on their trading desk and select one trader and give them your entire life savings to trade for a year, do you think you would be able to pick a good trader? Are you "certain" you would get your money back? You committed the cardinal mistake of confusing the expected value of an entire desk with determining whether any one particular trader on that desk is certain to be profitable.

 

[Handle123]

Most will say we trade Price Action or TA, but when it comes down to it, we are trading emotions and we ALL Predict. We are predicting price will go a certain way, otherwise why do it? There is only one thing that is certain in life - Death, and everything is a prediction. No one can say 100% certain if their heart will beat one more time, the sun will rise or if the highs are in the ES.

I could care less what people say, we all know the "herd" are seldom correct for any length of time. People come in for several months, maybe a couple years and lose all their money, that's great for me. They say ones who making money are lucky, fine with me, I am one lucky son-of-a-bitch for over twenty years. Yep, the markets are random, ka-ching ka-ching, markets are manipulated, ka-ching ka-ching.
http://www.youtube.com/watch?v=ykuvHnNGHNc

Trading can be a bit like blackjack if you counting cards, you know when more facecards in deck you want to bet more. If Price Action showing a Secondary top, baby I am going to load up and sell sell sell. http://www.youtube.com/watch?v=wDI6SEIzwNM

I don't care about proving anything, yep, everything I trade is luck. Or I have figured out what to do based on emotions, granted, I am seeking the dumb and take away their money, the inexperienced who get all excited and get in when the market is near the highs, I will sell them all they want and more, and when total fear is upon them and they getting out, I will will buy all they want to sell but at lower prices than they wished they can get. Yep it sounds ruthless, but that is what the game has always been and will always be.

Trading is like playing Pacman each day, you playing the same game over and over and over, moments of luck, but eventually you learn 99% of rules to reduce the being unlucky. Best game in the world.

http://www.youtube.com/watch?v=tCcxr-fyF4Q

 

[hitchslap]

Quote from Maverick74:

Actually not true. You just got fooled. In their entire trading department among the thousands of traders they took all kinds of loss every single day of the quarter. But on the aggregate, their "firm wide" p&l was positive. If you had to go on their trading desk and select one trader and give them your entire life savings to trade for a year, do you think you would be able to pick a good trader? Are you "certain" you would get your money back? You committed the cardinal mistake of confusing the expected value of an entire desk with determining whether any one particular trader on that desk is certain to be profitable.

I'd pick any of them! that's the point. They are all trading with an edge. Any one of them would make me money 150 odd days out of 200.

 

[jem]

ok in your terms... when does an account have enough of a variance from the expected variance to show skill.

for instance if you ran a series of monte carlos and showed that in less than .01 percent of the outcomes a person made that much profit without that small a drawdown...

etc...

there must be some be some way to say... that is skill.


===

by the way to some degree I am falling into the non trader trap.

Because in reality a good trader can frequently tell you what is likely to happen if the scenario is setting up up the way he thinks.


Or he might say I only have a 20% chance of support breaking but if It does I make a 10 r return...

then you see the person do that a lot... and you understand they understand.

by the way I suspect you know this I am just posting this for all the others who choose to not understand trading skill.

Quote from Maverick74:

Huge difference comparing sports with trading. For example, if I played Andy Murray in tennis (and I use to be pretty good at tennis) and played him 100 times. I would probably, no, I would definitely lose 100 times out of 100. That is called skill. There is no variance in the results. It's when you have large variances, that's when luck can surface simply due to the distribution curve of results. If my mother were to start daytrading the spoos, if she did it long enough, some where in her results she would have a streak that would make many of you envious. It would be pure luck of course via the variance. But still, with a skilled marketer she could probably raise money and start a hedge fund.

What Taleb talks about and I have read his work thoroughly is how a lot of professionals can hide away in the variance of life. It's not just trading, there are other professions like acting and of course politics. Anything that has a large distribution is vulnerable to allowing you to be fooled by randomness.

One of the reasons this business attracts so many snake oil salesmen is that they can live and breed within the mountains of data that exist in this business. It's so easy to take that data and make it say anything you want it to say. As long as you have a large enough distribution. So what Taleb is not saying is that there are no talented traders out there. What is he saying is that you won't be able to identify them with a high degree of certainty. And the good thing is you don't have to. Most people in this business who hire traders or money managers are skilled at reducing variance and lowering volatility and minimizing the potential risks of being exposed to bad traders or money managers. And the beauty is, you can do that without even knowing exactly which ones they are.

 

[Maverick74]

Quote from jem:

ok in your terms... when does an account have enough of a variance from the expected variance to show skill.

for instance if you read a series of monte carlos and showed that in less than .01 percent of the time... an person made this much profit without this much drawdown...

etc...

there must be some be some way to say... that is skill.

You need to find accounts with as little variance as possible in a sample which has a large degree of variance.

 

[Maverick74]

Quote from hitchslap:

I'd pick any of them! that's the point. They are all trading with an edge. Any one of them would make me money 150 odd days out of 200.

I think you are confusing sales traders who make a nut on transactions with actual buy side risk takers. On the revenue line of most financial statements there is no distinguishable difference. It's lumped into one. Yes, the commission business is good, trading not so much.

 

[Cdntrader]

Quote from jem:

I think we need a book titled fooled by Nasim Taleb's book.... Fooled by Randomness.

So many people attribute success to randomness now... I reminds me of how ever thing was Ironic for a few years after the Isn't it Ironic song.

So many people like to compare trading to coin flips.
I just saw someone else compare trading to black jack.

Is Warren Buffett lucky? how many trades has he made?

How about Andy Murray.
The wimbledon final has a binary outcome just like a coin flip.
How can you distinguish winning a Wimbledon finals from a coin flip?


At what point can you say a trader is successful.

For instance I knew a trader who once made a few hundred percent a year trading about 20 days a day.

He traded a few million shares a month and made money almost every month for five years. Yet... one of the most respected posters here said it could have been luck.

---

At what point or what metrics does a trader have to hit to prove non randomness.

I always thought that if his expectancy is positive when looking back on his trades and he has a steady equity curve and a lot of trades... you have a real trader.

there is however a caveat...

selling premium produces a great equity curve until you blow up.... so I think a person does need to show a lot of losses til you can effectively evaluate the methodology.

I think people who are successful traders figure how they themselves work.

Trying to rationalize complex,chaotic markets? Ya good luck with that.

 

[blah12345678]

Humans only possess 1 skill - Failure. And we're very good at it.

Any success we enjoy is due to luck (if we have No control of the outcome) or experience (if we have some control of the outcome).

What most people equate as "skill" is actually just an attribute. To say someone is better at something all able-bodied humans can perform is no different than noticing someone is taller or shorter than you. It's just one sample of all the various possibilities.

Playing tennis, crossing the street, trading, driving a car - how can you say the process of performing these activities is a skill when all able-bodied humans are able to participate?

One attains an attribute of "betterness" due to experience - repetitive activity that gradually build up situational-based "Do" and "Don't" lists.

Andy Murray is a better tennis player than Maverick because (1) he won the genetic lottery for tennis movements, (2) he's practiced a heck of a lot more, and (3) he's played more matches against better players. The net result, when you compare Maverick and Andy Murray's experience is that Murray's "Do" and "Don't" lists are much larger, cover more situations, and most importantly, he's encountered each situation many more times, thus establishing mental and muscle memory.

And that's it in a nutshell - the attribute "betterness" is not skill or talent. It's mental and muscle memory applied to specific situations for specific activities. And one obtains/retains these memories due to our innate biology that we neither understand nor control.

Are Warren Buffet or George Soros skilled or lucky? I vote for lucky for the following reasons:

1. If either started their careers 6-12 months earlier or later, their career results could be vastly different. Timing is important, as their available equity could have been much lower or much higher when key opportunities arose.

2. Gather their trading results (wins/losses in $), and run it it through a Monte Carlo simulator, and you'll see that their massive success is just one in a million possible outcomes. They've enjoyed path-dependent success. Change the path (the order of the winning/losing trades/deals), and a lot of the possible outcomes would be lower levels of success and blow-ups before reaching the end.

Do the same with the results of your next backtest. Instead of focusing on how good your strategy is. Focus on how bad it is. How many times it blew up. How deep the drawdown was before you recovered. MC sims are great in showing you how "bad" bad really is.

3. Survivorship bias - does anybody know how many people have came and gone in the money management business in the last 50-60 years? I venture, worldwide, at least 500K-2 million. I can't back it up with data, but the number is without a doubt large. Given that, it is understandable that 1-2 persons could enjoy significant gains while 1-2 blew up spectacularly. The rest are dispersed between the extremes.

 

[StarDust9182]

Quote from jem:

I think we need a book titled fooled by Nasim Taleb's book.... Fooled by Randomness.

So many people attribute success to randomness now... I reminds me of how ever thing was Ironic for a few years after the Isn't it Ironic song.

So many people like to compare trading to coin flips.
I just saw someone else compare trading to black jack.

Is Warren Buffett lucky? how many trades has he made?

How about Andy Murray.
The wimbledon final has a binary outcome just like a coin flip.
How can you distinguish winning a Wimbledon finals from a coin flip?


At what point can you say a trader is successful.

For instance I knew a trader who once made a few hundred percent a year trading about 20 days a day.

He traded a few million shares a month and made money almost every month for five years. Yet... one of the most respected posters here said it could have been luck.

---

At what point or what metrics does a trader have to hit to prove non randomness.

I always thought that if his expectancy is positive when looking back on his trades and he has a steady equity curve and a lot of trades... you have a real trader.

there is however a caveat...

selling premium produces a great equity curve until you blow up.... so I think a person does need to show a lot of losses til you can effectively evaluate the methodology.

No matter how many test samples you do, no matter how sure you are of your methods, no matter what, every single trade one makes is partly luck and partly skill. In the long run, the luck will cancel and the skill remains. So one answer is that whatever confidence level you need, run an Z test on sufficient samples to be below that level and that shows skill in the best method that you will ever have to any confidence level.

IMO, testing "edges" is often about the confidence of the trader and not the confidence of the method. I think testing is greatly over-rated and I don't know of any strictly mechanical system that works. They all have periods of working and failing of different lengths. So again testing is highly over-rated and very dependent on the test sample range and the tester bias. I think there are only a couple of edges ( other than arbitrage types) expressed in different ways but really the same edge at an abstract level.

Mathematically, in a fair market on an infinite term, every system will lose. 100% confidence is not doable. 99.9999999% is doable with a series of enough trades though. It doesn't matter since your trade life is not infinite anyways. (what if you were a counter trend bond trader starting in 1981 for example and retiring now). If there was a 100% level, then the market is broken.

Your 20 year trader could have been just lucky, but most probably he was skilled. A 5 year trader with sufficient number of trades was also skilled.

The market is not random anyways, it is chaotic and that is a huge difference. (Think of chaos as simple rules but unpredictable results.)