Gambling and trading

Q3D said:
...all trading teachers should have to go through a mandatory third-party vetting of their P&Ls over a multi-year timeframe, to show that consistency in day trading is nearly impossible with such a large distribution of data.
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Trading teacher A teaches a trading method that, if followed, produces consistent profits over a 5-year period, but trading teacher A's P&L over that period is negative and analysis of trades shows that this teacher does not trade the method s/he teaches.

Trading teacher B teaches a trading method that is missing some important pieces and if one attempts to follow it according to the pieces described produces consistent losses over a 5-year period; yet trading teacher B's P&L over that period is extremely positive and analysis of trades shows that this teacher trades in a way that bears no resemblance to the method s/he teaches.

Whose trading method will be more likely to produce a profitable student?

By the way, consistency in day trading is astonishingly possible. The consensus seems to be that at least 95% of day traders lose money over time. That's about as consistent as you can get in an environment of uncertainty.

The main reason why day traders lose despite studying (and often even understanding) profitable trading methods is purely psychological. Price movement in the markets is not totally random; the distribution of certain repeating price behavior patterns is random. This fact allows for consistently profitable trading over time, but our natural tendencies to search for certainty and perfection sabotages us in a environment where favorable overall odds inherent in series' of trades require us to accept "failures" on a regular basis:

Louis Menand's review of Philip Tetlock’s book makes the point that in "more than a hundred studies that have pitted experts against statistical or actuarial formulas, ... the people either do no better than the formulas or do worse". Menand suggests that the experts' downfall "is exactly the trouble that all human beings have: we fall in love with our hunches, and we really, really hate to be wrong". Tetlock puts it like this (p. 40): "the refusal to accept the inevitability of error -- to acknowledge that some phenomena are irreducibly probabilistic -- can be harmful."

Tetlock illustrates this point with an anecdote about an experiment that "pitted the predictive abilities of a classroom of Yale undergraduates against those of a single Norwegian rat". The experiment involves predicting the availability of food in one arm of a T-shaped maze.The rat wins, by learning quickly that it should always head for the arm in which food is more commonly available -- betting on the maximum-likelihood outcome -- while the undergrads place their bets in more complicated ways, perhaps trying to find patterns in the sequence of trials.

Tetlock suggests that humans perform worse in this experiment because we have a higher-order, more abstract intelligence than rats do: "Human performance suffers [relative to the rat] because we are, deep down, deterministic thinkers with an aversion to probabilistic strategies... We insist on looking for order in random sequences."

The students looked for patterns of left-right placement, and ended up scoring only fifty-two per cent, an F. The rat, having no reputation to begin with, was not embarrassed about being wrong two out of every five tries. But Yale students, who do have reputations, searched for a hidden order in the sequence. They couldn’t deal with forty-per-cent error, so they ended up with almost fifty-per-cent error.
 
Visaria said:
Depends on how you play the market. If you play the market like a slot machine, your results are gonna be similar.
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I agree -- the devil is in the details to be successful at trading.
alot of people say it's gambling to put your money in play in the market. :mad:
 
lawrence-lugar said:
I agree -- the devil is in the details to be successful at trading.
alot of people say it's gambling to put your money in play in the market. :mad:
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What makes trading gambling is the ignorance of the trader. Not knowing if he truly has an edge, not knowing how to maintain discipline, not knowing how to position size ... any of these things can change what should be a winning strategy into a losing strategy.
 
NoDoji said:
"Human performance suffers [relative to the rat] because we are, deep down, deterministic thinkers with an aversion to probabilistic strategies...
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I posted in another thread today:"I trained my brain for many months from opening till close of the market in realtime, but without executing the trades, till I had the feeling that the new knowledge was the first reaction in any circumstances."

As I trade only on probabilistic strategies I had to learn to have no aversion for probabilistic strategies. My old knowledge was the aversion (which was the natural reaction for humans), my new knowledge was to change my behavior and use probabilistic strategies as natural and evident behavior. It took me a lot of efforts to make that transition. I experienced that the brain can be a very powerful opponent, who was difficult to beat.
 
i am nobody said:
If you believe gambling and trading are the same you should stop trading.

Probably those who always speak about randomness can explain why the facts, that are real and undenibale, in following posting do not appear to be random. I copied this posting here to make it easier to read.
http://www.elitetrader.com/et/index...analysis-seriously.294703/page-7#post-4187020
Maybe the following is undeniable proof that markets are not random, and this implies that TA can work:

1.If you throw a dice, the smallest possible value is 1 and the biggest possible value is 6. Each time when you throw, the value will be at least 16.7% of the previous one (from 5 to 6) and maximum 600% (from 1 to 6). So the outcome from the next throw will be between 16.7% and 600% different from the last throw. This is a huge range.

2.If you take all the closing prices from the s&p since 1/1/1950 (16544 days of data), then we see the following:

  • The closing price from any day is always between 91% and 111.5% of the previous close. There was only 1 exception on that: 19 october 1987, when the markets crashed. Then it was 79%.
  • If prices would be random the value should vary between 0 and infinite. This is clearly not the case. The prices even stay in a very narrow range. Even if we would narrow the random range to 0 till 200%, the real values use only 10% of this range. This creates a very high probalitity, which is never found in real random data. Here TA comes in the game.
  • For 65 years the price never dropped more than 10% and never rose more than 11.5% from one closing to the next one. If you throw a dice the only thing that is sure is that the outcome will never be more than 600% whereas in trading the outcome will be between 91% and 111.5% of the last close with a VERY HIGH probability. The range of about 20% is also much smaller than the range for throwing a dice which is almost 600%.

I am interested in the explanation why moves in a limited range can happen over a long period and still be random. Not a single quote was outside a 91% to 111% range of the previous quote. In randomness the quotes should jump up and down between zero (because that's the lowest possible value) and infinity. You even see the quote go up and down continuously in blocks of consecutive rising or descending quotes. Is that still random?
Gambling has nothing to do with trading.
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No one who says the markets are random mean the type of randomness you are talking about. They mean that markets follow a random walk - taking current price and raising or lowering it by a random percentage with each step.

Additionally, there is a distribution applied. The analogy of a single die roll is a flat distribution. Taking the sum of two dice is a little closer to correct distribution than this.
Following this analogy, we could start price at 100, roll a pair of dice, sum the pips, and update the price as follows: 7 = 0% change, 6 = -1% change, 8 = +1% change, 5 = -2%, 9 = +2% etc. Note that large changes are more rare than small changes.

To model a growing asset we can also apply an additional fixed percentage change on top of this. To model a more volatile market, we can raise the percentage change that each pip represents. It gets more complicated than this, we really should be using an infinite number of "dice", and we should be accounting for the fact that price can go up by an infinite amount, but only drop by 100%. But this is the basic idea of the random walk.
 
wwatson1 said:
Well said, and for your information you can also make money from random periods in the market with the right strategy
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True randomness cannot be traded profitably long term, vs. buy and hold, almost by definition. True randomness has a perfect balance between trendiness and choppiness. What you are referring to as random periods are times where the market behaves choppier than random.
 
SicilianTM said:
True randomness cannot be traded profitably long term, vs. buy and hold, almost by definition. True randomness has a perfect balance between trendiness and choppiness. What you are referring to as random periods are times where the market behaves choppier than random.
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Indeed. If true randomness could be traded then a slot machine could be beat but no-one has done it yet, apparently. Of course once you figure out the algorithms are only semi-random or you can tilt the machine odds in your favor by manipulating it otherwise, it's entirely possible.
 
gkishot said:
Didn't you claim to have clients in another thread?

http://www.elitetrader.com/et/index...investors-to-start-a-hedge-fund.295056/page-3
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You should read ALL my postings. I had clients and an own fund. When I had enough money I stopped to trade for others. Only trade my own money since then. All profits are now for me. See no reason why I should do the work and take only a small part of the profits.
Nobody asking me questions, no stupid discussions with CFTC anymore, no membership NFA anymore, no paperwork, no expenses....
In short all problems and expenses are gone and profits multiplied by X. Don't even have to trade if I don't want to. Complete freedom.
 
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