Gambling is betting on an uncertain outcome. Some gamblers are better than others because they focus on "smart money" bets.
Trading is betting on an uncertain outcome. Some traders are better than others because they focus on "smart money" trades.
Trend Following Is Not Predicting
- Thread starter kut2k2
- Start date
Trading is betting on an uncertain outcome. Some traders are better than others because they focus on "smart money" trades.
"The public" (where do you get these terms?) often doesn't know when to call it a day. That doesn't mean they were wrong until that point. They rode the wave. They just stayed with it too long.
On the other hand, there are personalities here at ET who doggedly trade against the wave from the get-go...
Someone's nose is very deeply and importantly embedded.
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Buy and hold is a form of trend following. This is not news.
The public doesn't trade, the public invests. Buy&hold, remember?
Speaking of cognative[sic] dissonance. how are those price drivers doing?
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What does "following" mean?
It means that trader does not know and can not determine (and therefore can not predict) how long and how far the trend will continue.
All the trader can do is to determine that there is a trend now. Trader operates in the "now", not a moment later.
But whats is "now"?
"Now" is the length of time (or tick or whatever) for the period of the chart that traders uses to determine the trend.
If the period on that chart is 5 min. Then that is the "now" for the trader. And that is the maximum lengths of the prediction that he makes while following the trend. In another 5 min he will have to reevaluate the situation and decide if there is atrend or not..., and that how he will follow the trend.
But lets say he sees a big support where the trend may end. He reverses upon price reaching it. And again he predicting only for length of the period of chart (5min)... If he will determine that the support is broken upon the end of that period he will be stopped out.
So the trader does make the predictions, but those are not the predictions that determine the goals where he will make profit or loss. He makes small step-by-step assessment of the now, (we can call it prediction) and that's how he works without knowing how long trend will continue, and where he will exit it.
So the old proverb:
"I have a bad news for you and a good one:
Bad news:Nobody can predict the market.
Good one: You do not need to predict the market to make money on it"
still holds imho.
It means that trader does not know and can not determine (and therefore can not predict) how long and how far the trend will continue.
All the trader can do is to determine that there is a trend now. Trader operates in the "now", not a moment later.
But whats is "now"?
"Now" is the length of time (or tick or whatever) for the period of the chart that traders uses to determine the trend.
If the period on that chart is 5 min. Then that is the "now" for the trader. And that is the maximum lengths of the prediction that he makes while following the trend. In another 5 min he will have to reevaluate the situation and decide if there is atrend or not..., and that how he will follow the trend.
But lets say he sees a big support where the trend may end. He reverses upon price reaching it. And again he predicting only for length of the period of chart (5min)... If he will determine that the support is broken upon the end of that period he will be stopped out.
So the trader does make the predictions, but those are not the predictions that determine the goals where he will make profit or loss. He makes small step-by-step assessment of the now, (we can call it prediction) and that's how he works without knowing how long trend will continue, and where he will exit it.
So the old proverb:
"I have a bad news for you and a good one:
Bad news:Nobody can predict the market.
Good one: You do not need to predict the market to make money on it"
still holds imho.
Frankly I'm reminded of this quote:
"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less." (my emphasis)
From your OP
"Harris thinks any statement about the future is a forecast. Most people would disagree."
.... how do you know this? Have you done a survey?
That's a weird thing to say - on that basis no trading strategy involves 'prediction' (as defined by you), since none of them assume that every trade (prediction) will be correct. It isn't something unique about trend following.
All predictions have a forecasting error (or should do). So my forecast that the sun will come up tommorrow, has a tiny forecasting error (nothing, in a quantum world, is completely certain). My forecast about what the price of the S&P 500 will be would have a much higher forecasting error.
I don't understand why you say I can't make a prediction about a statistical distribution (and call it a prediction), but not have a clue what random draw will be made from a distribution. So I can predict that the distribution of the fraction of heads over a large number of coin flips will have a certain mean (0.5) and standard deviation (depends on the number of flips). That doesn't mean I know what the next coin flip will be.
If I then extend this to a trading position, I might look at the trend (or any other data - it doesn't matter what kind of trading I am doing) and then say "I forecast that the distribution of future price drift will have mean +X and standard deviation, and based on that I am going to take a long position of Y". That doesn't mean I know what the price will do tomorrow, or what the price will be in a week. I don't claim to be forecasting that.
Essentially I can't make what you call a smart bet without first having come up with a prediction.
It strikes me that you are making a differentiation between traders who have price targets, and those who do not (although you haven't said that in an explicit sense, I think that is what you are getting at). Clearly trend followers don't have price targets, whereas those who do can be accused of making an explicit prediction on prices, without attaching a forecasting error or distribution to the forecast.
Of course it's perfectly possible to have all kinds of trading strategy that don't have price targets, not just trend following (for example, I run 3 basic kinds of signal, trend following and two others, and none include price targets).
Secondly even someone who has a price target is effectively forecasting a distribution. That is why people have stops. The stop, if properly set up, should be triggered once the price moves outside the path implied by the forecast, including the forecast error.
Thirdly anyone who places any kind of trade on is forecasting a distribution. The size of their position, relative to the risk of their market, and their risk appetite, implies both what they think the mean and the standard deviation will be (even if they haven't done this in an explicit way).
What's weird about this conversation is you are vehmenently arguing with someone who agrees with you - I do think trend following is a good thing; something like 95% of my family household wealth came from trend following and two thirds of my risk capital is in it right now.
It's interesting how many people who are involved in trend following can be a bit... can sound somewhat .... (trying to think of a nice way of saying this) ... can hold unusual forthright opinions. This tends to give trend followers a bit of a bad rap.
Actually maybe that's fine; it doesn't bother me that trend followers have a slightly unusual reputation, makes me feel like I'm one of the cool but slightly kooky crowd in school (though I'm really just a hanger on), and it can only help my profits since if it had a better reputation then more people might do it, which would probably hurt me.
GAT
The "public" have been replaced by any number of ill advised hedge funds that now take their place in "buying all time highs"...Just look at some of the performance numbers...the industry likes to promote the exceptions, but the reality is a different story...
Besides the public went broke in 2000 and then again in 2007/08...if/when they do buy it's basically dumped into the market via their proxies (aka 401-k's)...they've been noticeably absent for years now.
http://bloom.bg/1Lkoca1
... Virtually nothing has worked better in this year's thinning equity market than momentum, where you load up on stocks that have risen the most in the past two to 12 months and hope they keep going up...
... Virtually nothing has worked better in this year's thinning equity market than momentum, where you load up on stocks that have risen the most in the past two to 12 months and hope they keep going up...
agree
wall street professionals is a public, and i think always was
average John Dow gets burned very soon and learn his lesson - he does not imagine himself as a great trader, he understand that he is a sucker
wall street guys get burned by the market even sooner, but the access to OPM (and therefore shifting of the risks to clients or taxpayers) provides the ability to live many, many lives on the market... and get them a feeling of immortality...
