No one on EliteTrader will beat the market⦠here is why
- Thread starter neutrino
- Start date
Dude you obviously don't hang around the CBOT do you! There are successful traders in every corner.
Just because You are giving up doesn't mean you have to write ultra negative posts discouraging other people!
Just because You are giving up doesn't mean you have to write ultra negative posts discouraging other people!
LOL
Quote from big_cabrito:
LOL [/QUOTE
Need I say more
Quote from neutrino:
I posted some of my thoughts on another thread on why you canât make any money from speculation (above the normal long-term return for stocks), but I didnât get challenged so I decided to post this in a separate thread.
Iâve been trading for a couple of years now, but only a week ago I finally realized that the academics are actually right and markets are efficient enough so that no short-term profits can be extracted from them on a consistent basis. Since then I stopped trading. To continue trading I need to convincingly disprove this hypothesis, or just accept it and put my money in an index fund and get a job or start a real business. So I hope on some feedback from you guys to help me and I hope we can make a discussion and challenge the very basis of our belief systems as traders â that we can beat the market.
Please have some patience and read at least the first two paragraphs below
***
There is no edge in trading and speculation. In a perfectly competitive market as is the stock market, the expected economic profit is ZERO, i.e. you cannot earn more than the normal return for the security you are trading without taking additional risk. This means that if you are a stock trader (or equity futures trader) you are expected to earn about 8% nominal return or about 6% real return (after inflation). You will also have to subtract trading costs from the normal return, so in effect you can expect to earn less than the normal return.
In markets which are not perfectly competitive (such as venture capital, real estate) you can still earn zero return above the normal return for these markets, but YOUR SKILL, INTELLIGENCE, EXPERIENCE and TIME INVESTED, will have a much bigger impact on your results than in a perfectly competitive market. Your skill and brains will count most (to a point where even dumb people can have spectacular results) where there is almost no competition or where you somehow manage to protect your business - with a brand (Nescafe), a patent (Pfizer), network effects (Microsoft, eBay), scale (Wall-Mart), addictive product (Coke, Phillip Morris) etc... That's a true edge. You have no edge buying and selling stocks - every information is publicly available and easily obtainable (including the price history!!!), your stock is no different than any one else's and you have a transparent, continuous auction process with tens of millions of buyers and sellers, no barriers to entry and a tiny spread. Your IQ, discipline and nervous system simply don't matter in such market. Whatever profits from inefficiencies there are, they are divided into millions of pieces between your competitors. The only true edge you can obtain is if you manage to buy at the bid and sell at the ask, because the fair price is in between - so effectively you buy below the fair price and sell above it. And also stay diversified, because you can earn a free lunch from undiversified investors, if there are any.
A lot of people think that if they are really smart, and hard working and disciplined and creative in their regular life, in school or in their non-trading job experience, they will have a similar results in the stock market and should be at the top of the game. But there is one crucial difference between the stock market and the normal environment we grow up with. If you are smart and work hard, indeed you have a very high chance of beating the next guy. But that chance quickly erodes when you put your skill and time in a perfectly competitive market. Imagine your chances of success playing poker against a single opponent. Let's say they are 99% against an unknown opponent. Now imagine playing at a table with 100 unknown opponents. The rules of the game will have to be changed somehow, there must be more cards in the deck etc., but the idea is that your edge (strategy, discipline, emotional control etc...) will rapidly vanish. No longer will you be able to track the behavior of your opponents and there will be no point in that because each one of them will have a negligible effect on the game. Your profit will be closer to the expected profit for all the players on the table, i.e. zero minus the rake for the casino. Everything will be determined by chance and not skill any more. The probability of leaving the table last with all the money is much lower than 99% now even though you are still the same player. If such game existed no one will want to play it, they'd rather go to the roulette. Traders and investors however are constantly bombarded with success stories and "new" information to trade so that they stay in the game and make commissions for Wall Street.
Think about it - no one with brains will go into a very, very competitive market such as retailers or groceries stores. But they rush toward the stock market, which is much more competitive (only the bond market is more efficient actually).
Many traders believe they have a system that has a mathematical edge. The truth is that their system HAD a mathematical edge, but it has a built-in systematic risk because the odds are very, very high that this system is already discovered or will be discovered soon enough to erode its profit margins and bring its return back to 10% adjusted for risk minus commissions. The nature of the market always changes as long as there are people to look at it, so it is in a constant evolutionary state that is completely unpredictable. Back testing is always curve-fitting by definition and is especially dangerous when applied to publicly available information.
The 'game' is multifaced, layered, geared into segments of size....no one is interested in you.
Just don't get involved if you don't understand the whole picture.
I don't believe this... I was looking at some older threads and I stumbled on the thread "95% of traders fail???". And almost exactly five years ago this is what I wrote in that thread:
I can't believe how overconfident and arrogant I have been
Edit: I checked my performance at the time and guess what - I was up 75% for the year when I wrote that
Quote from neutrino:
12-23-03 08:28 AM
It seems to me that a person with a superior intellect and emotional control can outperform the market...
If there is luck in being a winner, it is that you were born a winner! The good news is that you do not know that until your life passes
That's why in trading you don't bet on the market - you bet on yourself. I don't think that success in trading has anything to do with the market or its efficiency because actually the money you make comes from the pockets of the traders who bet that they are smarter than you, but they are wrong...
And one last thing - even though the future cannot be "predicted" some people "predict" the future better than others and take their money accordingly. This is because the future course of events can be extracted from the available information and a proper analysis. The better the information and the deeper the analysis - the more precise the prognosis. Now don't sell me this crap about how efficient the market is, how well the information is distributed and how everybody is making the same correct conclusions. They don't. Even the toss of a coin is not purely random and you can predict the outcome if you have all the relevant data.
I can't believe how overconfident and arrogant I have been
Edit: I checked my performance at the time and guess what - I was up 75% for the year when I wrote that
Quote from neutrino:
I posted some of my thoughts on another thread on why you canât make any money from speculation (above the normal long-term return for stocks), but I didnât get challenged so I decided to post this in a separate thread.
Iâve been trading for a couple of years now, but only a week ago I finally realized that the academics are actually right and markets are efficient enough so that no short-term profits can be extracted from them on a consistent basis. Since then I stopped trading. To continue trading I need to convincingly disprove this hypothesis, or just accept it and put my money in an index fund and get a job or start a real business. So I hope on some feedback from you guys to help me and I hope we can make a discussion and challenge the very basis of our belief systems as traders â that we can beat the market.
Please have some patience and read at least the first two paragraphs below
***
There is no edge in trading and speculation. In a perfectly competitive market as is the stock market, the expected economic profit is ZERO, i.e. you cannot earn more than the normal return for the security you are trading without taking additional risk. This means that if you are a stock trader (or equity futures trader) you are expected to earn about 8% nominal return or about 6% real return (after inflation). You will also have to subtract trading costs from the normal return, so in effect you can expect to earn less than the normal return.
In markets which are not perfectly competitive (such as venture capital, real estate) you can still earn zero return above the normal return for these markets, but YOUR SKILL, INTELLIGENCE, EXPERIENCE and TIME INVESTED, will have a much bigger impact on your results than in a perfectly competitive market. Your skill and brains will count most (to a point where even dumb people can have spectacular results) where there is almost no competition or where you somehow manage to protect your business - with a brand (Nescafe), a patent (Pfizer), network effects (Microsoft, eBay), scale (Wall-Mart), addictive product (Coke, Phillip Morris) etc... That's a true edge. You have no edge buying and selling stocks - every information is publicly available and easily obtainable (including the price history!!!), your stock is no different than any one else's and you have a transparent, continuous auction process with tens of millions of buyers and sellers, no barriers to entry and a tiny spread. Your IQ, discipline and nervous system simply don't matter in such market. Whatever profits from inefficiencies there are, they are divided into millions of pieces between your competitors. The only true edge you can obtain is if you manage to buy at the bid and sell at the ask, because the fair price is in between - so effectively you buy below the fair price and sell above it. And also stay diversified, because you can earn a free lunch from undiversified investors, if there are any.
A lot of people think that if they are really smart, and hard working and disciplined and creative in their regular life, in school or in their non-trading job experience, they will have a similar results in the stock market and should be at the top of the game. But there is one crucial difference between the stock market and the normal environment we grow up with. If you are smart and work hard, indeed you have a very high chance of beating the next guy. But that chance quickly erodes when you put your skill and time in a perfectly competitive market. Imagine your chances of success playing poker against a single opponent. Let's say they are 99% against an unknown opponent. Now imagine playing at a table with 100 unknown opponents. The rules of the game will have to be changed somehow, there must be more cards in the deck etc., but the idea is that your edge (strategy, discipline, emotional control etc...) will rapidly vanish. No longer will you be able to track the behavior of your opponents and there will be no point in that because each one of them will have a negligible effect on the game. Your profit will be closer to the expected profit for all the players on the table, i.e. zero minus the rake for the casino. Everything will be determined by chance and not skill any more. The probability of leaving the table last with all the money is much lower than 99% now even though you are still the same player. If such game existed no one will want to play it, they'd rather go to the roulette. Traders and investors however are constantly bombarded with success stories and "new" information to trade so that they stay in the game and make commissions for Wall Street.
Think about it - no one with brains will go into a very, very competitive market such as retailers or groceries stores. But they rush toward the stock market, which is much more competitive (only the bond market is more efficient actually).
Many traders believe they have a system that has a mathematical edge. The truth is that their system HAD a mathematical edge, but it has a built-in systematic risk because the odds are very, very high that this system is already discovered or will be discovered soon enough to erode its profit margins and bring its return back to 10% adjusted for risk minus commissions. The nature of the market always changes as long as there are people to look at it, so it is in a constant evolutionary state that is completely unpredictable. Back testing is always curve-fitting by definition and is especially dangerous when applied to publicly available information.
I just wanted to put these quotes next to each other - they are fascinating.
By the way I made money daytrading almost everyday for 5 years and now I don't really have an edge strong enough to trade full time.
Markets are far from efficient.
Nasdaq 100 had no earnings when it was at 5000 in 1999. Where is it today.
How can that be efficient.
My hypothesis
The market "attempts" to efficiently allocate liquidity based on flawed relational models and aggregated beliefs.
The oil market - that was all about hedge fund liquidity and their belief demand would be high enough to keep their piled in money safe. Nothing efficient about that. Hedge funds had too much money and were looking to hide it.
The spread is much higher, but while it may be 10 cents at a typical book, it's often 0-2 cents (0.5% to 1%) as a market, and the market is less competitive. Betting exchanges are okay but you'll only get the lowest spread by having using a good variety of books.
I had thought about moving to the financial markets for a while and I have to say I wish I'd made the move earlier. I wouldn't say the advantage is easier profit, but the number of opportunities and ability to use much greater capital.
Back to the topic, no market is perfectly efficient since price is created by humans and based on opinions. To assume the market is perfectly efficient is to assume it is always right. This is in an environment when the individual will often be wrong, so by chance alone the market will occasionally be wrong. Throw in emotion, ego, different goals and flawed thinking into the mix and it just becomes more of a mess. If the markets are so efficient, why the booms and busts? Why would price fluctuate so greatly day to day, month by month, and year by year? When we do understand the the markets are not efficient, it isn't a stretch to assume that many are taking advantage of that inefficiency.
To jem and Mr J : Efficient does not mean rational. You don't need to prove that markets are not rational - everyone knows that... but only in hindsight. It's easy to say that the dotcoms were ridiculously overpriced in 2000, but then they were overpriced in 1999,1998 and they could continue to be overpriced for many more years. Or as Keynes said - the markets can remain irrational longer than you can remain solvent.
Same with oil - it did look like a bubble at any price above $100, but how can you know. We said the Chinese were buying. And when it broke the trend at $145 you could expect it to go to about $100 and find support there, but down to $40 ?!? And now its easy to say that hedgies were liquidating, but again you never know, may be there is some fundamental force at work and it will stay below $100 for a very long time.
Efficient in the context of the Efficient Market Hypothesis means unpredictable - that you cannot exploit any irrational behaviour or its result - mispricing of certain securities or the whole market. At any trading time horizon you have millions of competitors and the price moves so that it hurts the maximum number of players in that timeframe. This shows up as drawdowns on your equity curve and day-to-day volatility, and if you keep those fluctuations close to the market fluctuations, you will receive a comparable return minus commission costs.
That's what the EMH says. But I no longer agree with it and I wrote why in the other thread. Simply put, I cannot expect very high returns above the market, but at any rate that's the best I could do, because in every other business, although with much less competitors, there are correspondingly high barriers to entry.
Same with oil - it did look like a bubble at any price above $100, but how can you know. We said the Chinese were buying. And when it broke the trend at $145 you could expect it to go to about $100 and find support there, but down to $40 ?!? And now its easy to say that hedgies were liquidating, but again you never know, may be there is some fundamental force at work and it will stay below $100 for a very long time.
Efficient in the context of the Efficient Market Hypothesis means unpredictable - that you cannot exploit any irrational behaviour or its result - mispricing of certain securities or the whole market. At any trading time horizon you have millions of competitors and the price moves so that it hurts the maximum number of players in that timeframe. This shows up as drawdowns on your equity curve and day-to-day volatility, and if you keep those fluctuations close to the market fluctuations, you will receive a comparable return minus commission costs.
That's what the EMH says. But I no longer agree with it and I wrote why in the other thread. Simply put, I cannot expect very high returns above the market, but at any rate that's the best I could do, because in every other business, although with much less competitors, there are correspondingly high barriers to entry.