The reality of "over-trading"

[loyek590]

+1

Not to be forgotten are those who arbitrarily limit the number of daily trades, based on nothing! I can't help but chuckle reading the posts married to the idea of making one or two trades a day and be done. As if they know what and when the market will be offering, let alone executing flawlessly to extract.

It doesn't really work that way. Unless you are martingaling with an unlimited supply of money in a game with no limit, your strategy will eventually end in ruin. You know that going in just like when you step up to a craps table. But unlike the craps table, the market offers different odds at different times.

when I was scalping ES we use to have what we called a "puke point" and that was a daily loss when hit you just quit and went out and got drunk.

time should really not be ignored when it comes to trading. It can be a powerfull ally when the future is unclear.

 

[chrisjs87]

I think the debate is, "Should you cut back during drawdown?"

Personally I don't think it's necessary if you're confident in your edge. Unless you've gotten to the point where your risk of ruin is too high, (which we should have modeled for from the get-go)

 

[loyek590]

Personally I don't think it's necessary if you're confident in your edge. Unless you've gotten to the point where your risk of ruin is too high, (which we should have modeled for from the get-go)

so there you go, no need to reduce trading just because things are going bad

 

[chrisjs87]

I don't agree that it is as simple as you described. The frequency of trading should be part of your strategy, if not you risk to overtrade, or undertrade, which is possible too.

I refer to a posting that I made in another thread: http://www.elitetrader.com/et/index.php?threads/average-of-trades-per-day.291830/page-3#post-4129269

The mathematical edge you have should be a constant regardless of the number of trades you make. If you can make 10 trades for a 1 point profit, or 1 trade for a 10 point profit, the result, minus the obvious increase in risk for the latter should be mathematically the same. Depending on the size of your bankroll, paying more in commissions might be the sacrifice you have to make to take on less risk.

Take 2 card counters in blackjack as an example. Lets assume both have an overall mathematical advantage of 1%, and a bankroll of $10,000. Card counter 1 spreads between $100-$500, and card counter 2 spreads between $15 and $100. Comparing their results, card counter 1 would be required to play fewer hands to achieve the same profits as card counter 2, but at the cost of increased variance, and an unacceptably high risk of ruin.

 

[chrisjs87]

so there you go, no need to reduce trading just because things are going bad

Thank you so much?

 

[loyek590]

The mathematical edge you have should be a constant regardless of the number of trades you make. If you can make 10 trades for a 1 point profit, or 1 trade for a 10 point profit, the result, minus the obvious increase in risk for the latter should be mathematically the same. Depending on the size of your bankroll, paying more in commissions might be the sacrifice you have to make to take on less risk.

Take 2 card counters in blackjack as an example. Lets assume both have an overall mathematical advantage of 1%, and a bankroll of $10,000. Card counter 1 spreads between $100-$500, and card counter 2 spreads between $15 and $100. Comparing their results, card counter 1 would be required to play fewer hands to achieve the same profits as card counter 2, but at the cost of increased variance, and an unacceptably high risk of ruin.

no, it doesn't work that way. The market can trend longer and harder than anything you planned on. Much harder than the average gaming table and more often. Nobody knows what the correct odds on the market are because they are not defined. Most go on history of the actual market, but others bet on the history of other things. And some just bet on a hunch. So there is an active pool of money to bet on.

Me personally? I've never had much luck betting on the past. Maybe because I don't have enough patience and intellect to study it properly.

All you need to know is the favorite usually wins, but not often enough to cover your expenses.

 

[qxr1011]

I hear many posters on this site warning others about the pitfalls of "overtrading", or lamenting their own struggles with "overtrading". I want to take this opportunity to remind you that if your strategy has an edge, you should trade it as frequently as possible. That being said, if your strategy does not have an edge, trading it infrequently will not compensate for the uselessness of your strategy. No amount of bankroll management will overcome this.

If your strategy produces increased losses with increased trading, the problem is NOT that you are overtrading. The problem is that your strategy is flawed, and you need to stop using it.

Playing fewer hands of baccarat or blackjack will not reduce the house edge. You will just reach your negative expectation more slowly. The same applies to trading.

Everything is correct !

But..

Most of the people do not have the edge. They think they have it, but they remember many many times in the past when they thought they had it too...And they did not.

So unconsciously, most of the people feel that they probably do not have the edge this time too.

Feel but do not know for sure. In order to make sure they continue trading, before they will be sure that they do not have the edge. But trading slowly,gradually, as you correctly indicated, reaching their "negative expectations".

That's where "do not over-trade" comes from...

 

[tiddlywinks]

It doesn't really work that way.

This seems to be YOUR statement du jour, so back at cha...

The "market" does not offer ANY odds. YOU, the trader, assign "odds" based on YOUR interpretation of the market. As Tony Robbins said, "Things do not have meaning. We assign meaning to everything." And that is where your system comes in. You have either assigned a meaning (with odds/probabilities) to what your senses are encountering or you have not. You are either acting on a what you have assigned meaning, or you are acting without an expected (likely) outcome. IT really does work that way.

 

[chrisjs87]

no, it doesn't work that way. The market can trend longer and harder than anything you planned on. Much harder than the average gaming table and more often. Nobody knows what the correct odds on the market are because they are not defined. Most go on history of the actual market, but others bet on the history of other things. And some just bet on a hunch. So there is an active pool of money to bet on.

Me personally? I've never had much luck betting on the past. Maybe because I don't have enough patience and intellect to study it properly.

All you need to know is the favorite usually wins, but not often enough to cover your expenses.

I work in the gaming industry as a floor manager, so I apologize for all of the casino analogies, but I find that the two 'industries' are closely aligned so I think it's only fair. Let me assure you that the stock market doesn't hold a candle to the money siphoning power of (for example)baccarat. There is only one true trend in baccarat, and it's around -1.06% percent per unit wagered. It's a pure negative sum game. The stock market is a teddy bear compared to baccarat.

 

[loyek590]

I work in the gaming industry as a floor manager, so I apologize for all of the casino analogies, but I find that the two 'industries' are closely aligned so I think it's only fair. Let me assure you that the stock market doesn't hold a candle to the money siphoning power of (for example)baccarat. There is only one true trend in baccarat, and it's around -1.06% percent per unit wagered. It's a pure negative sum game. The stock market is a teddy bear compared to baccarat.

ah, then you've probably witnessed some unbelievable trends.