Quote from illiquid:
Thanks Neke for replying directly to my posts.
Given the names you trade and the size at which you trade them, even one position at a time, you should not be too impressed with say a 50K gain on the week, given the volatility. Or put it this way: do you think you can achieve the same numbers if you were limited to 2000 shares maximum on each position? If not, how close do you think you would come?
Trading that size one position at a time, you should not be overly impressed with 50K gain in a week, while you should not be overly surprised by 50K loss a week. If limited to 2000 maximum per position, same number of trades, you should not achieve the same result. However, if you have 10 X 2000 positions instead of 1 X 20000, there is no reason not to achieve a similar return with reduced volatility, assuming a similar edge on your trades.
You need to be very careful about distinguishing between a real edge and leverage bailing you out. I've been through this realization several times; clues that it's more buying power than edge reveal themselves in the pattern of your wins/losses. Are one or two trades/days making your week/month, so to speak, while the rest cancel each other out? Do your biggest positions taken result in the biggest profits? Or are they usually just avg winners/outright losers? I know for most position/swing traders it's one or two big winners that usually make their months or even years, but as an intraday trader you should achieve a much higher level of consistency...
Leverage is not an edge. I don't know how else to illustrate it. You can be bailed out in the short-run, but my example was meant to show that the longer you trade the less likely it is that your result is a fluke if using leverage the way it is granted by the brokers. I don't know how many trades you want to see, but I have made thousands of round-trips since my first thread started. I believe in what I do, that's why I do it. I am not here to convince you I have an edge. One person may be convinced by a 1 in 300 event, another by 1 in 1000000, yet another will not believe in 1 in 10 to power 1 million - he cherishes his position more than the evidence.
If a hedge fund has 2 trades out of say 20 making their year, I do not see why someone having 2 trades of out 20 making their week is any different. Back out my automated trades which are made with small size, you are probably looking at 15 discretionay trades on average a week. I have said it repeatedly I do not make 1000 trades a week: it is not my style. Besides I cannot do that while on a regular day job, that's why I look for the one or two trades that should make my day, and seek to get the maximum from them consistent with my risk tolerance
The coin flip argument about a false edge not being able to survive leverage is specious; trading is just not comparable to a series of 50:50 or 45:55 etc propositions -- percentages are only valid in hindsight. You have to dig right down to the nitty gritty of WHY you've put on the trades you did, and whether those REASONS hold and will continue to hold in the future. If you say you are mostly a discretionary trader, then you can really throw the coin flip stuff out the window -- the whole issue just cannot be quantified in that way with any accuracy for future performance.
I used the coin toss analogy because it is the simplest and best I can think of. If you are are making assertions like being "bailed out by leverage" or presenting statements on quantitative metrics as facts, you've got to be able to back those up with sound mathematical reasoning. If that analogy is not a good one, I am waiting for your model that explains how leverage is an edge in the long run. I am irked when people present assertions that do not stand the test of logic, and make no effort to prove them.
