Are trader's skills really important?

umm... i can see that i'm having difficulties making myself understood.

so let me rephrase: it is perfectly possible to specify a system (complete with detailed entry/exit criteria, involving both shorts and longs, etc.) that will a) pass your skill test, b) be really trivial, so no skill is involved, and c) fail miserably once the favorable market conditions (luck of the 2nd type) change.

besides, i don't really see how having a specified system would make your test (which is purely statistical and assumes nothing about the underlying trades) more valid.

- jaan

 

still, i don't think this requirement will save your test. in my "raging bull" example above, it is really easy to define a corresponding system: buy a basket of nasd100 stocks at the open, sell N days later, repeat. profitable, yes. your test passes, yes. skill involved, no.

What do you mean: no skill involved. How can you go long 5000 times during a bull market and claim that there is no 'skill involved.' (I'm defining 'skill' as a system matching the current market conditions.)

You wouldn't expect 5000 heads as a result of 5000 coin flips, would you? Of course a single trade as opposed to 5000 would save you a lot on commissions, and since the system is basically trying to time long term trends trading frequently would not be an advantage.

So now the market conditions change and we are in a bear market. Now there is no skill involved, since the system no longer has a positive expectancy under the current market conditions. How long do you think it would take the trader in your example to figure this out? That is exactly what DAT-Waw is trying to do. Any equation that tells you the probability that your system is profitable due to luck as opposed to a positive expectancy system (skill) would also tell you what is the probability that your system is no longer profitable because of a change in market conditions as opposed to bad luck. Needless to say this could save you a lot of money. (Dat-waw would have to explain the math in his equation for it to be useful for most of the people on this board, though. That includes myself )


in my view, a trader can be called skilled only if s/he can consistently make money during the worst of market conditions. since the "worst of market conditions" is always yet to come, there is no way to be sure (in a strict sense) whether it's skill or luck.

So, to rephrase this, a positive expectancy system can only be called that if it can remain positive during the times when it's the least positive. That would leave out a lot of very profitable systems (including long term investing during bull markets.)

Then you say that since a system can always become even less positive, you can never be sure if it was positive to begin with. I'm not sure what you mean by that, but as I said above, if market conditions last long enough then you can certainly use Dat's equation to find out if your system has a positive expectancy while those conditions last. It follows then, that it can also tell you when those conditions change.

voodoo

 

DT:

No offense but posting something like this on a board with people fighting in the trench everyday make you look like some pathetic loser PHD who wrote a book on market analysis but doesn't trade for a living.

I am going to offer you the same advice a senior trader offered me when I first started at the firm:

SHUT UP AND PLAY.

Seriously, it is completely pointless to talk about whether market is random or not, whether the computer is better than human at trading. I do know in my firm, there are traders who make seven digit a year, there are traders who quit after six months, and I don't care whether it is luck or skill, I want to be the seven digit trader one day.

All this analysis is total garbage on the battle field, after you trade real time real money for one month (especially in a professional environment), all of it will be apparent to you, until then this really is a silly discussion.

And after reading your comments I can already say that unless you wash your brain you will not make it. You are already seriously lacking in capital, which is the number one newbie killer. But even worse, you don't even know for sure whether trading is for you or not, so you continue to sit on the sideline and make up lousy excuses. It is a really really bad recipe for a new trader, you either want it badly and go all out or don't even think about it. When you hit your learning curve you will start making up all the garbage excuses about the lucky stars.

You gotta be able to say that "If others can do it, and I put in my 100% effort, I can do it too". I had that thought deep in my heart, even then after bad days I questioned myself countless times. How can you possibly not make a bad name for traders if you don't know whether it is luck or skill to begin with?

 

Hitman: you either want it badly and go all out or don't even think about it.

Probably the best advice you could give to any new trader. It's a war out there, and everybody else has better weapons than the new trader.

 

voodoo,

i don't disagree with much of what you say, but i think we're getting entangled in details. so let me distill my point:

trader's performance is a function of:
1. luck
2. market conditions
3. skill

therefore, to really find out the amount of skill involved, we need to account for both (1) and (2), not just (1).

so my point is that while (1) is easy to account for (DT's test will do that), there really is no bulletproof way to account for (2).

sure, you can try to detect the change in market conditions, and adjust your trading accordingly, but there is no guarantee that the adjustments won't kill you (in fact, more often than not they do).

(note: the above point can be applied to systems by making the following substitutions: "trader"->"system", "skill"-> "true long term expectancy".)

- jaan

 

hitman & magna,

i think you are slipping into patronizing here. i for one find this thread both interesting and relevant. sure, i have an academic degree and do automated trading as opposed to being with you in the "trenches" (ie so what do i know), but i believe more tolerance towards theoretical/academic discussion on this board would not hurt anybody.

this isn't highschool, you know, so yelling "school sucks" won't win one any admiration here. i hope...

- jaan

 

thanks, based on the above i know i need it, at least in the short term peace & good luck to you too.

- jaan

 

Dottom pretty much finished this argument. But I appeal to experience. Does anyone doubt traders pay attention to round numbers. Dow 10,000? On Monday morning will we look to buy a rally that appears headed for that number, will I dump some to see how we handle it. Will I buy a boatload if they start to roll on buy programs. Will I be the only one. How can anybody who observes the markets claim they are random.

This discussion elicts a response from me because I majored in Economics and my professors told me the markets were efficient. Luckily, I did not believe most of the stuff I was taught in college and I will not believe most anything academics say (I will listen but I will not believe) until they can explain to me how an observer can influence whether light is a wave or a particle.