simple strategy....but very profitable

[darkhorse]

Originally posted by ArchAngel
Don and darkhorse -

Forgive my two cents, but it seems like leverage is the key advantage Don is citing for prop firms (e.g., slinging $1M in stock with only $25K equity) - along with some ancillary benefits like access to bullets, more attractive hedged position margin, etc.

But, index futures daytraders can trade with around 30-40x leverage intraday, no uptick rules, no issue about bullets, no screwing with multiple execution routes, rational hedged position margining, and the added advantage of no prop firm needed.

ArchAngel I think you are right, the props push the use of leverage, but they don't mention that your risk capital is still what you start with. If someone lends me 100 million bucks but I can only afford to lose $100,000 then my positions are still going to be small.

I used to be a commodity broker so I know all about futures leverage, you are right that 5% (20x) beats the heck out of 50%(2x). Plus earning money on your tbills is a sweet kicker. Single stock futures will come in at 20% leverage and will probably be lowered later down the road.

Having switched over to stocks, the advantage I see in equities over minis is the ability to swing both ways at the same time. I can have a stable of strong longs and weak shorts, play them against each other, and put the difference in my pocket. When you are trading the mini you get one direction and that's it, you can't insulate your position against vicious reversals and swings. Playing both sides against the middle allows for better overall consistency and lower drawdowns in rough periods.

 

[Magna]

voltrader,

You're still making a (common) false assumption regarding probabilities. First, from my previous post:

Originally posted by Magna: The error in your thinking is taking the fact that stocks are either winners or losers and equating that with a probability of 50%.

And from your follow-up post:

Originally posted by voltrader: your reasoning doesn't apply to the old womans strategy. She picks a stock....and keeps it until it moves 10% in either direction....thus, every trade will be either a winner or a loser..... My argument is if she used this strategy and flipped a coin it would over time come out to 50%

And there's that ugly blemish again, your mistaken assumption that a random selection of stocks (say, by flipping a coin) will produce 50% winners and 50% losers. I suppose, with a large enough sample and a designated time-frame, and assuming during that period 50% of all stocks happen to be winners and 50% happen to be losers, a case could be made for the proverbial flip of the coin. And in the random world of the stock market, with an infinite variety of overlapping time-frames, this exact 50/50 split undoubtedly occurs from time to time. But assuming it to be true all the time so that flipping a coin will provide 50% winners is the fatal flaw in your thinking.

 

[jaan]

Originally posted by Magna
And there's that ugly blemish again, your mistaken assumption that a random selection of stocks (say, by flipping a coin) will produce 50% winners and 50% losers.

well, i don't think you need the exact 50%-50% distribution to justify the comparison of trade outcomes to coin flipping.

if we forget commissions and general market trend for a moment, each trade by the lady mentioned at the top of this thread has a 50% probablility of ending up as a winner, and 50% probablity of ending up as a loser. just as each toss of a balanced coin has.

of course you are right that this does not mean that out of every 100 trades 50 will be winners and 50 losers, as the probability of ending up with the exact 50-50 split in 100 trades/tosses is only 8%. in fact, a 50-50 split is almost 2 times less likely than a 49-51 split.

- jaan

 

[Magna]

Originally posted by jaan
each trade by the lady mentioned at the top of this thread has a 50% probablility of ending up as a winner, and 50% probablity of ending up as a loser. just as each toss of a balanced coin has.

jaan,

You're making the same mistake in assessing probabilities. Just because each trade the lady takes ends up as a winner or a loser by no means translates into a 50% probability of each. Yes, a balanced coin has that probability, no a trade doesn't.

 

[jaan]

Originally posted by Magna
You're making the same mistake in assessing probabilities. Just because each trade the lady takes ends up as a winner or a loser by no means translates into a 50% probability of each.

hehe, i know it's always difficult to argue with you

in general i would agree with you (well, not entirely, but i don't want to argue over details). however, as voltrader pointed out, this lady's case is special. her exit point is at 10%, either up or down. assuming a random entry (and ignoring those trades that never move 10%), the setup is symmetrical. in symmetrical setup, the outcome has (by definition!) a probability of 50% either way.

or let me put it this way: if you agree with me that a balanced (ie symmetrical!) coin has a 50%-50% probability of the outcome, then what would make a symmetrical trade setup different in that respect?

in mathematics, symmetry is the king -- and it really doesn't matter what it is applied on. there's a whole mathematical discipline - group theory - that deals with symmetric systems. it arrives at mind blowingly powerful results without assuming anything about the underlying systems besides that they are symmetric in some way.

- jaan

 

[Magna]

jann,

I really don't want to be argumentative but you keep making the same invalid assumption. Tell ya what, this will be my last post on the subject, you can have the final word...

Originally posted by jaan
this lady's case is special. her exit point is at 10%, either up or down. assuming a random entry the setup is symmetrical. in symmetrical setup, the outcome has (by definition!) a probability of 50% either way.

or let me put it this way: if you agree with me that a balanced (ie symmetrical!) coin has a 50%-50% probability of the outcome, then what would make a symmetrical trade setup different in that respect?

The ladies setup, even tho it will provide a 10% loss or a 10% gain is not symmetrical in the same sense as a balanced coin. The latter will always land about 50% heads and 50% tails. But her trades will not necessarily do the same by any stretch of the imagination. As a simple case, suppose that she had a fondness for tech stocks and started selecting and trading them in the spring of 2000. Ten percent loss, or ten percent gain, and she's out. She would have had at least 95% losers. Even though she randomly chose them, even though she had a large sample. Think of trading as an unbalanced, unsymmetrical coin (that every once in a while, randomly, happens to be balanced).

In any case, there's nothing I can do to further explain it. Probability is tricky for people (I know, I was a math major in college), and folks just love getting stuck on this ridiculous notion that because stocks are either winners or losers, that somehow translates in their minds to a 50% chance of each. NOT.

 

[darkhorse]

Magna:

What are the odds that you are saying to yourself a variation of the same thing I have often said after engaging in yet another fruitless debate:

"why, oh WHY am i banging my head against the wall with this guy?"

better than 50% i bet....

 

[Magna]

Originally posted by darkhorse
Magna:

What are the odds that you are saying to yourself a variation of the same thing I have often said after engaging in yet another fruitless debate:

"why, oh WHY am i banging my head against the wall with this guy?"

better than 50% i bet....

100%

 

[jaan]

Originally posted by Magna
The ladies setup, even tho it will provide a 10% loss or a 10% gain is not symmetrical in the same sense as a balanced coin.

...because of general market trend. well, ok, i can agree with this. however, i don't necessarily agree with your assessment of the magnitude of the market trend influence:

She would have had at least 95% losers.

i'd say 55% would be more realistic number in her case, but i'm too lazy to run a simulation to verify this.

Even though she randomly chose them, even though she had a large sample

actually, as you know, the probability of a single event does not depend on particular sample (or size of the sample) it happens to be part of. each toss of a balanced coin has 50% probability of each outcome, even if the toss happens to be part of a "losing streak".

- jaan

 

[Cesko]

Magna:
As a simple case, suppose that she had a fondness for tech stocks and started selecting and trading them in the spring of 2000. Ten percent loss, or ten percent gain, and she's out. She would have had at least 95% losers.

jaan:
actually, as you know, the probability of a single event does not depend on particular sample (or size of the sample) it happens to be part of

Put it another way. Entry is random and whether BUY OR SELL is random too. I think it should be to satisfy the logic of the argument.