How do you know?

Discussion in 'Trading' started by blackjack666, Oct 10, 2009.

  1. I was reading another trading forum ealier and spotted this reply to someone who said that they had found a good trading system:

    "Did you know that if you had traded the S&P using butter production in Bangladesh as an indicator from 1983 to 1993 you would have been rich beyond your wildest dreams, and you probably would have thought you were a trading genius. Then if you had continued to trade this way after 1993 you would have given every penny back, and more.

    Replace "butter production* with "MA crossover" and you hopefully will get the idea"

    This got me thinking how do we ever know that what we are using isn't just coincidence? How much data is considered statistically relevent?

    I spent a few hours on excel today and tracked the results of one specific setup that I use which gave about 54 ES points from January to July over about 6 trades per day.

    However, since mid July to now, that same setup would actually be losing.

    I know that in these types of threads Traderzones just comes in and says 'TA doesn't work'. Fine, but then what does? (exluding FA for now)

    Is it all about super mathmatical models/algortithms constantly scanning various data for opportunities?

    Or about somehow 'making' a market and capturing the spread (something i've heard about but dont understand at all. Can you do that trading the ES on ninjatrader for example?)
  2. NoDoji


    For short term trading (intraday to month-long swings), I've noticed that a 20-period moving average in your time frame works exceptionally well and IMHO is all you need on a chart.

    Study the charts and notice that when the 20 MA is rising, price moves from proximity to the 20 upward. If the 20 is falling price moves from proximity downward.

    You can trade with the trend:

    > buy into an uptrend when price dips back around the 20 and pivots up, as it should then at least test the previous high and if the trend is intact either range there for a continuation move up, or make a new high.

    > sell into a downtrend when price rises back up around the 20 and pivots down, as it should then at least test the previous low and if the trend is intact either range there for a continuation move down, or make a new high.

    You can trade counter trend but you need very strict risk management, because price can often go much further than you think from the 20 EMA before pulling back to it.

    If price is ranging around near the 20 EMA, you can trade moves from the top to bottom of the range, with stops outside the range in case of a quick reversal breakout. The nice thing about this is that if you're long at the bottom or short at the top of the range and price breaks out at the other end you catch a very nice move.

    If trading stocks I'd recommend trading ranges intraday only, because overnight gaps often occur out of narrow ranges and can wipe out a lot of profit if you're on the wrong side of the breakout.
  3. NoDoji


    BTW, this strategy gets you long on a higher low (because the MA is rising) and short on a lower high (MA is falling).

    It's especially successful if your profit target is 2x or more your stop.

    After a multi-leg up trend or down trend, a very safe countertrend entry is to short the first lower high after an uptrend and buy the first higher low after a down trend. This often places you in the new trend at the beginning.
  4. Blackjack, your point is virtually aligned with Nassim Taleb in his book, Fooled by Randomness. This is a man with a Phd in mathematical finance and worked several years as a pit trader. Nonetheless, he states that for the most part, it's all "luck"... skill can help you to earning excellent returns; however, to attain great wealth, one needs luck and skill... He emphasizes the fact that many folks will be successful with a particular strategy or indicator for several years, until the day or time period when it no longer works.

    Look at the great minds that blew-up after years of success... Victor Niederhoffer, LTCM, Charles Cottle (as far as I've read), Bear Stearns (in addition to several other hedge funds and banks), and so many others. Even someone such as Richard Dennis and the turtle system. Allegedly he made over 200 million with that system; however, he has since abandonded it after loosing about 50 million.

    As Steve Cohen stated, "this is not a perfect game... you're going to be wrong alot". I believe he stated that most of his traders win about 50% - 55% of the time, with his best trader winning only about 63% of the time. This is billionaire who has several millionaires trading with his firm, SAC.

    The problem is that it works... until it doesn't. Unfortuneately, many have outsmarted themselves by being "fooled by randomness".
  5. FB123


    This is a load of crap, and underlines Nassib Taleb's lack of market understanding. Luck has absolutely NOTHING to do with your success across more than a handful of trades. ANYONE who trades a system that stops working and then doesn't know what to do is lacking in their market understanding.

    Lots of other people never blew up. George Soros comes to mind. If someone blows up it is usually for deep-seated psychological reasons, not because trading inherently involves luck, or because that luck eventually stops working. Just because some traders blew up doesn't prove crap about how the market really works.

    One of the primary aspects of trader skill is what I call your "shut-off" switch. Your "shut-off" switch kicks in when you start doing something stupid, like getting angry, taking a bad trade, or maybe your system just stops working. If you are trading a system and it stops working, then you, as a trader, need to identify that and TURN THE DAMN THING OFF OR STOP TRADING. Then you need to find a better system that is working with current market conditions. This is in fact the #1 SKILL OF ANY SUCCESSFUL TRADER. If you don't have this, you are royally FUCKED. If you don't have this, then you are NOT a trader - you are just a stupid idiot following a system and trusting to fate.

    This could be happening on time frames as low as five minutes to time frames as high as a few months... but over your chosen time frame, when what you are doing stops working, adapt. You know that it isn't working because your trades are turning into losers and you are losing your market feel. Something is wrong, and you need to detect that. In this case, your skill as a trader is to flip your "shut off switch", and walk away. You regroup, re-analyze, and come back with something that DOES fit the current conditions.

    People who blew up failed in this regard. Their "shut off switch" stopped working, or never worked. That shows their LACK OF SKILL AS TRADERS. It doesn't prove crap about the randomness of the market. If you have a shut-off switch, and if you use it, and if you can analyze the markets, you will always be successful.

    Which is a testament to his SKILL. If it was luck, he would have continued to trade and lost all 200 million, now wouldn't he? Personally I think he should have stopped before he lost that much... but in any case he did stop. That is where trading skill comes into play.

    Of course you are going to be wrong a lot, on individual trades. That doesn't mean anything, especially since win % is irrevelant. Win % times average win size is what matters, as compared to loss % times average loss size. People who quote only win percentages betray their lack of understanding about trading.

    In the longer run, when averaging out your performance through hundreds or thousands of trades, luck is not involved at all. Not even 0.00000000001%. NOTHING TO DO WITH IT. That is what losing traders cannot accept, which is why some of them come on this board and make fools out of themselves trying to prove otherwise.

    No, they have "outsmarted" themselves because they SUCK ASS. A great trader does not "outsmart" himself.

    All of the people who had systems that worked, and then screwed up when those systems stopped working are basically traders that lack something in their market understanding. That includes a lot of so-called great traders who blew up, although I would suggest that in their case it was not so much a lack of understanding as deep-seated psychological issues. Just because a lot of people have internal issues doesn't mean that trading has anything to do with luck. One does not logically follow from the other.

    TRUE market understanding cannot ever be screwed up. It cannot ever "stop working". If you are trading a system and that's all you know how to do, then you are at the mercy of market conditions. If market conditions change you are screwed, because you don't really understand the market in its full depth. A lot of people trade this way. A lot of people SUCK.

    At its core, the market is nothing more than a large group of people buying and selling for one purpose only: to take each other's money. The way in which these people interact is not random, and it does not change. The patterns that print as a result of this activity will always be changing slightly, but at its core, the activity is always fundamentally the same and is very repeatable and detectable as it moves through its various phases.

    Basically, the market alternately gyrates through periods of high emotion, and periods of boredom. It is your job as a trader to understand these conditions, how long they last, and detect when they are changing. This cannot be put into a system. You can't write a mathematical formula to describe this transition consistently. It just comes down to your human mind looking at the big picture, and saying to yourself "what phase is the market in right now"? Then you have a system to apply to that market phase.

    A mechanical system itself cannot tell you which phase you are in and therefore which system you should use, because it's too complicated for a computer... but not for your mind. I can identify with much greater than 50% accuracy when a trend is beginning in a given instrument that I trade. I see the signs all the time, every damn day. IT NEVER CHANGES AT ALL. People who don't understand this stuff just don't know how to trade, so they are constantly surprised when the market moves one way or another. All they can do is "trust to their system" and hope that it sees them through the choppy seas that are market conditions. They do this by trying to take every trade and having faith that it will work out. This is because their market understanding is lacking, and when that life-preserver called their system starts to break, they are screwed. But that's not because markets are random. It's because they suck as traders.

    Fundamentally, at its core, the market always does the same thing. It goes through periods of ranging activity, and then periods of trending activity. That's it. It doesn't do anything else. If you understand the true principles that drive this activity and detect as the market transitions between one state and another, that cannot be taken away from you.

    You combine that with your "shut off" switch, and you have a successful trader. When you don't, you have people who come on message boards and complain about the randomness of the market and say that those who have succeeded have only done it through luck. Amazingly, these total idiots don't seem to understand that it is statistically impossible for there to have been so many successful traders with runs of "luck" that lasted as long as they did (many of which are still going). They should go back and learn high school math, but I guess that's beyond the ability of their tiny little brains to comprehend.
  6. Redneck


    Very well stated Sir

    btw OP - You'll know - once you know

  7. Blackjack

    There are several starting points for finding out the answers to your question.

    The professionals of the financial industry work mostly from their need to attract capital through a sales and marketing approach. SAC is successful at keeping the pot churning with the quality of traders it has.

    As pointed out there seems to be a sense that nothing lasts forever. This sphere is governed by a common orientation. As you come to anwser the question in that context, it becomes pretty clear that The foundation upon which these operations were built is the inductive process. It is terrific for one of their past practioners to figure out using the foundational math that things do not work out ultimately. Do not expect an answer to arise from these people for they cannot do the reasoning.

    You see nodoji doing induction with some TA properties which is different than the stats approach most common to the induction based crowd. Check TZ's references for more on the stats based stuff. some of the stats he refers to do slip over into the TA field by applying the financial industry stat procedures to TA (TA is not used in the financial industry to speak of).

    There are alternatives to all of the above. You will find that a lot of well known techicians develop methods around a particular math application other than stats or TA. Often geometry of periodic functions are used from the field of continuous functions. Markets do not have the characterisitcs of continuous functions some there is a slight mismatch.

    Recently, in my lifetime, two other fields have come into play: Information Theory and the sciences centering on how the mind works. The combination of these two turns out to be very fruitful.

    Artificial Intelligence is more an extention of the sales and marketing approach of the financial industry. I say this because of the general influence of sales and marketing to clients and the correlation to how markets perfom.

    I collect scientific papers too and I personaly found that I do not post their titles nor their personal importance to me. They have become a complete set now and for me they verify my views from a very stringent critical thinking point of view.

    The parallels between the fields of science and a field that could be called the science of markets is instructive. I conclude that there is a mathematics for markets and the descriptive behavior that results fits as fully as the related mathematics fits each field of science.

    Specifically, I conclude that markets are fractal in nature and the specific mathematics that describes the behavior most suitably is binary analysis as applied the the parametric measure of the hypothesis set. This is very far way from Taleb, of course, and it has no resemblance to all the failures in the financial industry nor the traditional level of performance of the members of the industry.

    In rigorous analysis this is a terrific windfall as a kind of proof that what I think and reason is very divorced from the massive evidence of the scatter charts of financial industry member's perfomance.

    The contrast between things that work for a while and then do not work compared to things that always work in any market on any fractal is delightful to operate with. No one will ever see the markets and their operations if they do not use the proper parametric measure. How could a person come to the measures being binary vectors with respect to time? The requirement comes down to deductive reasoning using both the variables of the market. Some people are prone to leave out one variable. The OP's question certainly did. Too bad for him and too bad for Taleb and too bad for SAC.

    Nodoji's expression of the FTT function in her last paragraph was delightful to read. Especially the part where she concluded that the entry was at exactly the beginning of what turned out to be the new price move. She defined a reversal using a binary method on a specific market fractal. She also happened to define the conditions of non reversals (trends, if you will) but not by a common measurement means. Now all she needs to do is recognize the second market variable and then be able to always know what must come next. It is like seeing the same process by which Acruary changed sides of the coin after many many years of being in the wrong ball park.

    The answer to your question lies beneath the surface where just how markets operate as living organisms. It probably was reasonable from the beginning to view markets as living natural things, but it didn't happen to any extent. Assigning the market a mind of its own is probably going to not be research worthy for the finacial industry and its parasitic academia. If we know how our minds work and use the analogy, then we get to see how to process information to always know we know. Think of how you drive a car.

    This is not a rant as some people assign to my writings. This is simply a reasoned comment on the context of the dilemma the OP has to continue to deal with. It is not pro or con to me for a person to have to think as I do. I do not expect anyone to put themselves in my shoes unless they just want to for a moment. I am glad to see any thinking going on no matter what the manner is. I regard each and everyone as peers since each of us brings a differing set of E and Q to the table.
  8. Redneck


    Hersey you never rant (that I recall) – but your ability to obfuscate the obvious is without peer

    Keep slinging the BS guru

  9. charts


    Statistics and models are great tools in the hands of those who know what they're doing. They work on the principle: GIGO (garbage in => garbage out).

    Can a frog hear if you cut his hind legs off?
  10. This reminds me of my favorite thread on ET which got me hooked.

    "Why Is The Obvious Not So Obvious?"

    Every time I go through that thread I learn something new. I still don't know what the obvious is though... :)
    #10     Oct 10, 2009