Strategy Trading, Probabilities & Blackjack/Poker

R

Remiraz

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Okay since ElectricSavant attacked me for "not sharing", i have no choice but to share so that people searching for my post history will see 862 rubbish posts and 1 debatable semi-good post. :D
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Some things i noticed about trading... (which is "been there done that" for about 50-60% of ET forum population anyway)

1) Trading is remarkably similar to Blackjack/Poker/Gambling!

Trading and gambling both revolve around edge and expectancy. Simply put, IGNORING SPREAD, COMMS & SLIPPAGE the chance of any random position hitting +x ticks is equal to it hitting -x ticks. Add the 3 evils and you get negative expectancy. This is regardless of any bet sizing you do! (martingale or otherwise)

This is eerily similar to roulette wheels and blackjack tables where you have a negative edge thanks to the fabulous house advantage of some times up to 15-20%. In the long run you will lose x% of your bet, where x = house edge. No bet sizing, martingale or betting systems will help.

The main objective in both trading and gambling is to then find an "edge" which will manifest in the long run. BJ counters count card and play hands with better probability than average, giving them about 1+% edge which appear in the long run. (they win the amount equal to 1% of their bet size)

2) Most trader don't have the money management blackjack card counters or poker enthusiats have!

This one is a shocker. Having learnt card counting and poker theories I mingled with both crowds and find that, to my surprise, most traders don't employ as much money management as gamblers! :eek:

For example, BJ counters tabulate their risk of ruin and size their bet accordingly. Most won't try to "beat the dealer" without knowing that their RoR is 0.2% or less!
Traders, on the other hand, slap a "risk 2% per trade" and go forth to the markets! :eek:

BJ counters know it takes about 10,000 hands or more to see their positive 1-2% edge. But most traders expect to "make money on the go" with 20-30 trades! There are journals featuring maybe 50 trades with 70% winners which proudly proclaims they have a 20% edge. :eek:

Due to variance, even a system with positive edge can lose money at the start and a system with negative edge can win at the start.

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My question: Can blackjack theory be applied to trading?

BJ basic strategy that decreases house edge to 0.5% is based on the fact that some hands are better than others. Thus bigger bets are made on hands that are better. Eg. doubling on good hands.

The main problem with applying this strategy to trading and betting more on good trades i think, is because of the unknown outcome. In BJ if you get a good hand, it is statistically proven that that combination of cards win more often in the long run, thus doubling ur bet (if the rules allow) will increase ur edge.

In trading, however, u don't have to play every hand and so far no one knows anyway to prove statistically that the current trade will win more often.

Thus i asked questions like this:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=53545

That thread asked : "is the trend really your friend?". If trading with the trend on a higher time frame has an edge, constantly take random trades in the direction of the trend would give profits in the long run.

Unfortunately, all my work has so far show that even in an uptrend, the chance of hitting x tick up or x tick down is equal! :(

So...who else wants to contribution regarding this topic?
 
Quote from Remiraz:

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Thus i asked questions like this:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=53545

That thread asked : "is the trend really your friend?". If trading with the trend on a higher time frame has an edge, constantly take random trades in the direction of the trend would give profits in the long run.

Unfortunately, all my work has so far show that even in an uptrend, the chance of hitting x tick up or x tick down is equal! :(

So...who else wants to contribution regarding this topic?
More...

You need something more than random entries.
 
Quote from Remiraz:


That thread asked : "is the trend really your friend?". If trading with the trend on a higher time frame has an edge, constantly take random trades in the direction of the trend would give profits in the long run.

Unfortunately, all my work has so far show that even in an uptrend, the chance of hitting x tick up or x tick down is equal! :(

So...who else wants to contribution regarding this topic? [/B]
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Who says that taking random trades in the direction of trend should give profits, besides you?
 
Im no mathmetician but it seems to me that random entries anywhere would be a 50/50 proposition and when you add the cost of doing business would have a negative expectancy out of the box.
 
How to put this -- you've got to get to a mental place where you view the market as far less random than a deck of shuffled cards.

Imo, the whole point about comparing trading to blackjack comes down to 2 lessons: 1) that one reserves his betting for the most optimum situations while preserving capital during the most uncertain conditions, and 2) being able to consistently stick with "basic strategy" because you have confidence in the long run and don't really obsess over each individual hand/trade.

I think the problem you are having is extending the analogy to include that the market is like a deck of shuffled cards. But the randomness of market movement that you claim to be certain of only belies your own ability (or lack thereof) to identify market opportunity. Randomness and comprehension are inverse corollaries in trading, just as it is with most other fields of study; the more you learn about a subject, the less "random" things appear, whether it be speculation, art, music, physics, language etc. So take what you can from card games but throw out the rest -- the markets are definitely not just a plain deck of cards, much less a properly shuffled one.
 
Quote from illiquid:

1) that one reserves his betting for the most optimum situations while preserving capital during the most uncertain conditions, and 2) being able to consistently stick with "basic strategy" because you have confidence in the long run and don't really obsess over each individual hand/trade.
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Trading in a nutshell.
 
Quote from Remiraz:

the thing is: how do we know our entries aren't random?
More...

This is a very powerful question. How indeed. Our "edges" may only appear to be non-random. Statistics is no gaurantee of future performance.

IMHO, there is only one way to know. First, one must understand what drives price. What is the abstract mechanism that causes prices to go up and down.

A 50ma does not cause price to move. Earnings reports do not cause price to move. News does not cause price to move. The ONLY thing that causes it to move is supply and demand. That is the root. Once you understand what supply and demand look like on a chart, then things aren't so random anymore.
 
Quote from bundlemaker:

This is a very powerful question. How indeed. Our "edges" may only appear to be non-random. Statistics is no gaurantee of future performance.

IMHO, there is only one way to know. First, one must understand what drives price. What is the abstract mechanism that causes prices to go up and down.

A 50ma does not cause price to move. Earnings reports do not cause price to move. News does not cause price to move. The ONLY thing that causes it to move is supply and demand. That is the root. Once you understand what supply and demand look like on a chart, then things aren't so random anymore.
More...
so the news of buy out with 20% premium had nothing to do with stock price's spike from 30 to 36$ ? It just happened to happens that 36 was the very point where supply met demand? I am not saying that I don't agree with your post , it's just not clear to me
 
Quote from IV_Trader:

so the news of buy out with 20% premium had nothing to do with stock price's spike from 30 to 36$ ? It just happened to happens that 36 was the very point where supply met demand? I am not saying that I don't agree with your post , it's just not clear to me
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Yep.

Now, don't get me wrong. News, fundys, etc; can all act as a catalyst. It's just that it's not possible to understand price movement by examining the catalyst. It's only through analyzing the causes. And, to state the obvious: there is only one reason why price moves up: somebody was willing to pay more for an item than the previous buyer. From that one statement of fact you can create non-random and profitable methods.
 
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