Fooled by Taleb

Discussion in 'Trading' started by jem, Jul 18, 2013.

  1. I agree with Maverick, the mathematics of independent multi-system trading can give completely non-intuitive results. That is two bad systems can give a good result for example depending on the overlap of the winning trades and when they come. It's mathematically complex.
     
    #21     Jul 18, 2013
  2. Well said. I have often said that most people have no idea what they really are trading.

    Luck, skill or something else, who cares as long you made money. It's an angels on the head of a pin kind of argument. The hardest thing for me was to trust my own instincts. I don't always know why I made the money, but I always knew when I was making money in the trading game.
     
    #22     Jul 18, 2013
  3. Bang on. Those who made the most in the (HFT) gold rush were selling picks and shovels and spreading rumors.
     
    #23     Jul 18, 2013
  4. Google confidence intervals, all this is high school statistics. Chance of it being random is a function of the number of players, and the probability of an exceptional result by luck. So, games with high luck inputs and large numbers of participants, like stockpicking or poker, it is harder to distinguish skill - this means that a higher number of exceptional performances are required before we start to consider someone is probably skilled.

    A rank piker can win the WSOP, bust out Phil Ivey in a cash game, or make 1000% in one year trading futures, even though the odds are massively against it. And with enough participants, there is a good chance one or two will do it by chance. However, if someone kills it in cash games or hedge fund trading quarter after quarter, and places at WSOP final tables or top of the performance leagues year after year, the chance of it being luck drops dramatically. After enough performance, the chance of it being random is even lower than the chance of a professor losing tenure.

    That's pure statistics...you can also increase the accuracy of the skill assessment by using other methods, like fundamental bottom-up analysis. E.g. if someone is au fait with poker theory, maths, and has lots of high stakes experience, is good at reading hands and people, and wins WSOP, it's probably skill. If someone who picked up poker 3 months ago and played with his buddies and a few 5-10 online games, wins WSOP, it's probably luck.
     
    #24     Jul 18, 2013
  5. Like GoC says, this is pretty well-covered by statistics. Maybe not quite high-school statistics, but anyways...

    The problem you're describing, jem, is identical to a very classical subject in statistics. Specifically, given a set of dice, which you roll an increasing number of times, how do you "determine" if the set of dice is "unfair". There's a whole group of what's called theoretical "goodness of fit" tests that can be applied to the problem above. The most basic of them is the Chi Square test, but there are others of increasing sophistication (Kolmogorov-Smirnov, Anderson-Darling, etc etc). On top of that, there's a whole lot of techniques that people in computer science have developed to test random number generators that is somewhat applicable (Don Knuth's Art of Computer Programming covers a lot of the empirical tests and also, arguably, the most powerful spectral test).
     
    #25     Jul 19, 2013
  6. southall

    southall


    Short term metrics on their own are not enough.

    I would want to see at least 3 years (more obviously gives you more confidence) of trading results in different market conditions, not just 3 years from a roaring bull market say.

    And also, probably more important, evidence of solid risk management.

    Risk management is what will save them from talebs black swan.

    You would want to see the specifics of the risk management being used, to ensure they are not using a texas hedge etc.


    So long term track record under varied market conditions + evidence of very low probability of being hit by a black swan.
     
    #26     Jul 19, 2013
  7. zdreg

    zdreg

    "A Texas hedge is a financial hedge that increases exposure to the risk one intended to mitigate. An example would be hedging the purchase of a call option by buying shares of the same underlying.
    Origin

    The origin of the expression is unclear. However, there are two competing theories among traders. One school of thought says that it refers to the saying 'Everything is bigger in Texas' because Texas hedging increases risk. Others believe that the expression is meant as an insult to the intelligence of the residents of Texas. It is the latter theory that is most popular among traders.[citation needed]. An alternative explanation is that the Texas hedge refers to Texan cattle ranchers who might buy cattle futures contracts while already owning cattle, thereby doubling their risk exposure.[1]

    As an alternative to "Texas Hedge", modern traders use other expressions including the "Patrick Murphy, or, David McFarlin Hedge". This is in reference to the two Chicago thousandairs whose hedging strategies have resulted in compounded losses within their sports betting account."
    http://en.wikipedia.org/wiki/Texas_hedge
     
    #27     Jul 19, 2013
  8. Do you mean that all edges boil down either to detecting the right moment to trade a continuation, or to detecting the right moment to trade a reversion?
     
    #28     Jul 19, 2013
  9. That is certainly one way to look at it, but I would say further that there is no "right moment".

    The market is a balance of opinions of buyers and sellers. If there was a method that worked 100% of the time, then who would take the opposite side of the trade? When I thought more about it, I concluded that markets are chaotic and statistics are very useful in dealing with my own uncertainty. Your own answer (your own "rightness" just like the your own confidence point made before) will be different, and that is a good thing for a healthy market!

    So (for me) ultimately one trades against the herd and one decides what level of risk to take on that trade and when to get out. So whether you use moving averages, price patterns, RSI , VWAP or chicken bones to give you the confidence to enter a trade, is not particularly relevant for me. At a roulette table, we don't see charting or chicken bone analysis done. Yet many traders have shown me a myriad of clever methods to say, that the market will turn here. And indeed, sometimes it does, and sometimes it doesn't!

    One edge is the ability to think clearly outside the herd and back your own opinion with confidence even in the face of contradicting evidence. (The 20 year chart of chicken bones says ......)

    Novice traders are always looking for magic, there is no magic! Their trading will improve immensely when they see this.
     
    #29     Jul 19, 2013
  10. Sergio77

    Sergio77

    I like this definition. Thanks abattia. This makes sense to me although it does not encompass 100% of all trading opportunities it is definitively a good percentage of them.

    I also believe that the random versus not random and skill versus survivorship bias is a stupid issue for people who do not trade to waste their time on. If someone daytrades and makes 100 trades a day and he finishes the year up 15% only a moron who is very stupid to understand what is involved will call him lucky. Sample size is the most important criterion.
     
    #30     Jul 19, 2013