On money creation and random walks...

[tymjr]

Originally posted by tradeRX
Hitting 50% of your trades is no better than RANDOM CHANCE... your system is in reality not picking winners with any degree of confidence beyond random chance, so all you are doing in essence is employing a very simple trade strategy... you do not have a system of picking winners, you have only a system of managing a winner once you get it.

It seems that you are separating trade management from the concept of a system “that picks winners with any degree of confidence beyond random chance.” The system’s ability to “pick winners with any degree of confidence beyond random chance” is a function of its trade management parameters. There also seems to be some confusion over the idea of random winning percentage. True random entry into a market does not necessarily produce a 50% win/loss. That win/loss percentage is impacted by the holding period. Trade management defines the holding period, which alters the possible winning percentage. While it has been proposed that the distributions of prices appear lognormal over time, trade management can increase/decrease the probability of a favorable outcome.

As I stated earlier, there are systems that offer a greater than 50% chance at defining an exhaustion area and still operate at less than 50% win/loss. Why, because the parameters needed to optimize net profit for such a system demand that you maintain a very tight stop. More precisely, the latitude needed to maintain greater than 50% increases losses which offsets the gains from the average counter extension. Modifying the management parameters to achieve greater than 50% win/loss reduces the net profit. That in no way makes it a useless system.

As you said, “The whole point is if the system CAN predict large trends at their inception, then it has TRUE predictive value.” and I would agree, with the caveats that this is, again, dependant on the management parameters and it is not predicting large trends as much as it is setting itself in the path of favorable indications of exhaustion and reversal. I also wanted to illustrate that a less than 50% win/loss system does not necessarily mean “you ain't doin' that good man”.

Shout out to Magna for a humorous illustration of the fallacious thinking regarding random entry in the “Financial Freedom…” thread.

Bye the way tradeRX, if this sounds like I am attacking you, then I apologize. I respect your opinions and have enjoyed reading some of your past controversial postings.

 

[Amadeus]

Rtharp you said

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One reason I got out of futures was the producers were no longer hedging but trading instead. They have some of the best inside market knowledge and finally started to use it to their advantage.
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would that not tend to produce longer trends, depending on the time frame the producers are trading in?



Tom

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The Actions of men are the best interpreters of their thoughts. John Locke

 

[liltrdr]

Just wanted to know if anybody actually put up money and did this. Even more important, did you make money?

 

[rtharp]

On the 2 different notes here.

First has anyone traded this system of random entry?

I know quite a few traders who have tested systems of this nature. They have heavily out performed the market. With returns in excess of 80% a year.

The only system that this didn't work for was the S&P's in the futures market. This was due for a few reasons but mainly getting random short signals in a very long bull market

It would probably now work with the S&P's now showing a different direction.

Needless to say there are higher probability entries than random but the test were to prove a point.

They work because by cutting your losers you owns a smaller % of securities underperforming the market and by letting your profits run on the winners end up owning a bigger % of the securites over performing the market.

 

[liltrdr]

I was thinking that random entry might work if the markets are volatile enough. It might increase returns with lower risk because you aren't stopped out as much. Of course, if nothing happens at your price in a few months, then nothing happens. But gains could be outstanding on the few calls that work. I'm totally ignorant about options so anybody have any ideas on how something like this could work?