Why predict?

[Indrionas]

Quote from EmRock:

So, in theory, if one where to devise a system that cuts losses and lets winners run, one could profitably trade a totally random market.

Absolutely wrong theory. If you trade really random market, you would always have expectation equal to 0. No matter if you cut losses and let winners run, because no matter what R/R you take, the win rate will give you expectation of zero. On top of that, add comission or spread, and you have negative expectation.

What makes "cut losses and let winners run" strategy to work in the markets? It is because markets are not completely random, they tend to move in one direction for prolonged time (so it actually means that probability for price to tick up is bigger than to tick down in up swings and vice versa for down swings.

What you say about prediction is true - you cannot predict future prices. But you can determine the more probable price direction (i.e. bias) and base your entry on it. What's more, I think the simplier entry rules the better they are.

 

[Thunderdog]

Quote from EmRock:

...why predict?

To win friends and influence people.

 

[rcanfiel]

Quote from Indrionas:


What makes "cut losses and let winners run" strategy to work in the markets? It is because markets are not completely random, they tend to move in one direction for prolonged time (so it actually means that probability for price to tick up is bigger than to tick down in up swings and vice versa for down swings.

This is truth. Efficient Market Theory has been generally modified to be "efficient with a drift, ie, trend component. But I do not agree with random cut losses and let winners run as a profitable strategy.


What you say about prediction is true - you cannot predict future prices. But you can determine the more probable price direction (i.e. bias) and base your entry on it. What's more, I think the simplier entry rules the better they are.

I keep saying people saying this, but I do not see the truth. To find a bias is to make a prediction. It is not called "weather biases" but "weather prediction." And weather is certainly not 100% predictive, especially as the future lengthens.

 

[Pekelo]

Congratulations for finally getting your courage and making your first post after 18 months. Now let's see:

Quote from EmRock:
...then why predict?

This is a rather SILLY question and equivalent with:

Why trade?

Why? Because whenever you are taking a position, you ARE PREDICTING. When you are long, you predict higher prices, when short, you predict lower prices. Otherwise your trading just doesn't make sense.

End of story....

Now, what is your 2nd question? I hope I don't have to wait another 18 months for it!

P.S.: The only difference between predicting and hoping is the degree of probability.

 

[Thunderdog]

Quote from rcanfiel:

...To find a bias is to make a prediction. It is not called "weather biases" but "weather prediction."

I'm not sure that's a very good analogy. A weather prediction typically includes a specific temperature, whereas a bias regarding price direction need not be so numerically specific in order to be useful. In fact, the more specificity you assign to a bias (or "prediction") regarding price, or weather for that matter, the more likely it is to be incorrect.

 

[Cocaine]

You jest like it is obvious but in fact you are wrong. Good traders DO NOT PREDICT. Prediction attaches your ego and your bias, two thing which kill profits when they get out of control. Rather good traders REACT to clues the market dishes out. I only take a position once the market tells me to do so, experience is the best teacher. I just sit here and wait until the market speaks. I dont force trades, or use my own "outside the box" ideas (my predictions, my forcasts). I trade when the market offers me an opportunity and dont when it doesnt. None of this is done by ME predicting ANYTHING.

I know it seems subtle, but it seperates the men from the boys. Usually a slightly different way of appraoching things makes all the difference in the world, trading is NO DIFFERENT

Quote from Pekelo:

Congratulations for finally getting your courage and making your first post after 18 months. Now let's see:



This is a rather SILLY question and equivalent with:

Why trade?

Why? Because whenever you are taking a position, you ARE PREDICTING. When you are long, you predict higher prices, when short, you predict lower prices. Otherwise your trading just doesn't make sense.

End of story....

Now, what is your 2nd question? I hope I don't have to wait another 18 months for it!

 

[NihabaAshi]

Quote from EmRock:

...In order to make money as a trader over an extended period you need, at least, a positive expectation or you must be extraordinarily lucky, or some combination...

where does your edge come from?

Most profitable traders that have been profitable for an extended period (more than 5 years) are not extraordinarily lucky.

Usually these traders are using or doing common sense things that they put at the top of their list of importance while other traders either ignore or put at the bottom of their list as something that's needed to maintain profitablility.

Sure there's a "little" luck just as much as any other trader but nothing that has any impact on consistent profits.

Thus, the edge is common sense stuff and there's many past threads here at ET specifically about the topic of what is an edge.

In addition, these profitable traders tend to have many edges and some of these edges are not involved as part of an entry nor exit strategy as noted in the past threads here at ET about edges.

Mark

 

[Thunderdog]

Quote from Cocaine:

...I only take a position once the market tells me to do so, experience is the best teacher. I just sit here and wait until the market speaks...

I agree with you. But just to put a finer point on it, when the market "tells" you to take a position, it is exhibiting a directional bias (based on your own predefined criteria) which you act upon.

In my own mind, anything beyond that is a crapfest.

 

[Pekelo]

Quote from Cocaine:

You jest like it is obvious but in fact you are wrong.

Or not. When you are long a position you are expecting/predicting/hoping higher prices so you can sell and make a profit. Otherwise you wouldn't be long, would you?

Now it is absolutely IRRELEVANT to the discussion that your prediction/expectation/hope is based on technical analysis, fundamentals, tea leaves or the weather. The only thing matters that you took a position and according to it you have a bias... Otherwise there was no point in taking that position....

End of story....

 

[Cocaine]

I agree, but I myself am not predicting that direcional bias. As directional traders we can only profit from the market moving up and down, but in which direction its going to go at any given moment is up to the market to decide. No prediction needed from us, just reactin to the bias the market has shown.

Subtle, but for me its the key to consistency.

Quote from Thunderdog:

I agree with you. But just to put a finer point on it, when the market "tells" you to take a position, it is exhibiting a directional bias (based on your predefined criteria) which you act upon.

In my own mind, anything beyond that is a crapfest.