If randomness has nothing to do with profitability then it should not be discudded here. People try to become profitable in trading. Posters who say that the market is random insinuated that, because of that, you cannot make money. So they linked randomness to (lack of) profitability.
Randomness "does" have something to do with profitability but not the way you are using the term. The conversation on randomness is a lot more complicated then I believe this thread wants to get into. It's not as simple as saying markets are or are not random. I don't want to take this thread in a direction that is going to bring out the "I don't need to know no stinkin math crowd". They lurk in the bushes waiting for threads like this and jump in here talking about trend lines and moving averages and secret potions and risk management is the "real edge" and all that crap. I'll just stay out of it.
Even though don't agree with you on some other things, I agree conversation is going no where fast. But I just want to ask, you do believe that people can use math to locate patterns or imbalances in the markets that can give a substantial edge right? or no? Just curious on your stance on that.
Yes but the issue here is people are throwing out terms that at least by the way they are using them gives the appearance they have no idea what those terms really mean. Just leave out math, technical analysis, patterns all that stuff. Because unless you define these things saying stuff like "I use math to get my edge" means nothing to me. I just don't know what you are saying. I will keep my answer very broad here, edges in general do exist in the market. You need to be able to define it. It needs to be falsifiable. Meaning it should have the ability to be dis-proven via the scientific method. And someone should be able to replicate the results. Simply saying it works for me is not enough. And yes I do believe these exist. But the conversation is much more involved in acknowledging their existence. If I took your edge and lied it next to an imposter that looked like your edge, could you tell the difference? Can you truly desperate the signal from the noise. Most traders are finding the noise that is disguised like a signal and often gives the exact same results. Only using the criteria I listed above can the imposter be exposed. Everything else is just another argument at Thanksgiving Dinner.
It is clear that I don't really understand what normal distribution, randomness, variance and a lot of other things mean. But the next question is: whats the importance in relation with trading? Is this knowledge essential for trading? My personal experience tells me: no. Understanding normal distribution, randomness, variance and a lot of other things, or having a university degree is no guarantee at all that you will ever be successful in trading. If not the world would be crowded with profitable traders. I know several wannabe traders with much higher degrees then I have, and they all probably understand what normal distribution, randomness, variance and a lot of other things mean. But they are not able to make consistently money in trading. I beat them all, without correct (or any) knowledge of normal distribution, randomness, variance and a lot of other things. So do you need knowledge of normal distribution, randomness, variance and a lot of other things to be successful? No. What is possible although, is that the missing knowledge is replaced by other techniques that give the same result. Which would mean that understanding normal distribution, randomness, variance and a lot of other things can be relevant, but can be replaced by other things. Advanced logical (out of the box) thinking and very strong analytical skills are far more important to me.
This. I could go through the whole thread and "like" all your posts, but this is really the one that says it all. Probability and statistics are really, really counterintuitive subjects, and most people are (for whatever reason - I suspect most likely the education system, as you say) simply not numerate enough to cope with them.
It's critically important because without it, you will never know if your results are due to luck or skill. If luck, then it will just be a matter of time before you blow out and lose everything. If skill, then you can confidently leverage more capital or even raise funds. But this is the first and most critical step after you think you found something. I hear this comment on ET all the time and it's completely off base. Understanding stats and math is not going to make you money. It's going to explain what you are doing. If you go to the doctor because you have pain, let's say your dr is the equivalent of the "i don't need no stinkin medical degree to be a dr. type". So he gives you some pain pills and sure as the wind, your pain goes away (confirmation bias). You call your new dr to thank him and tell him how much better you feel on this new drug (Oxycontin). Whatever it is you tell him, it's sure doing the trick. Had your dr been able to diagnose "why" you had this pain, he would have discovered you had pancreatic cancer and all the pain pills did was mask the pain. For months on end it appeared the dr's strategy worked and you confirm this by showing your results (no more pain). Until one day you wake up, maybe several years later and now the pain is unbearable and the pills are not working anymore. Blood is coming out in your stool and you can't eat. This time you go to a "real" dr, you know the ones that went to medical school. And he gives you the bad news, stage 3 pancreatic cancer with weeks to live. You see, the first dr is like a bad trader. He has a quick solution that appears to give results and the longer the results are valid, the more he believes he was right. What you needed was someone who could diagnose "why" you were having the pain to begin with. And that takes knowledge and skill. The same with trading. Anyone can make money, that's not the hard part. The hard part is understanding why you are making money so you can figure out if it's just the pill or is it cancer. Unfortunately, most traders only discover the problem when their money is gone (stage 3).
First I would like to tell you that I really appreciate what you write and I agree with you. Also the way you “discuss” is refreshing. I feel intuitively, but also based on my +20 years of experience, that you are one of (the very few) people on ET who knows what he is talking about. But I only have limited abilities and have to use them at max to survive. So what you tell that should be done is for me impossible. I am too stupid for that. And I have learned not to show or share my real performances with anybody. After the story you told, I would like to tell you also a story. Trader A is trading the ES for +10 years profitable now. After struggling for more than a decade to survive and to become profitable. He started with a modest capital. As he saw that his system appeared to have lots of winning trades and very few losing trades he did not have to invest 10,000 ’s of dollars. He noticed that even with a small capital he would quickly generate decent profits, especially because he was going to use compounding. He also realized that he could blow up. One more reason why he started with a modest capital. This gave him the opportunity to blow up his account 10 times in a row without ever harming himself financially. He said to himslef: “If you have a good system start slow, you will be millionaire a little bit later than planned, but if ever it turns out bad you will at least not completely wipe out from start.” As his backtests showed him that he, on average, gave back less than 10% of the generated monthly profits in losing trades he could trade with an aggressive leverage. Therefore he was always reinvesting his total profits in new trades, but with 1 limitation: When a stop was hit (3 points ES) he had to be able to do the next trade with the same size as the losing trade. This to prevent that he should make big returns to recover small losses (like lose on 3 contracts and then try to recover on 2 contracts). Backtests showed him that weekly profits almost always went over 100% of the initial invested capital. This was partially due to the relative small size he traded. So he decided to reset his account to the initial starting capital end of every month, or sometimes sooner if profits skyrocketed (some weeks could be huge will others could be very small, depending on what the market offered). The result was that the first week was the most dangerous one, but even if the account would be wiped out there would be no problem at all and he would start over again. The possibility to wipe out his account 10 times in a row were, and still are, almost non existing. I never heard of a trader that wiped out 10 times in a row. And even then the damage would be small compared to the total net worth of trader A. But he survived the first month, and his real results were in line with the backtests, he had +16 times his starting capital. Resetting it to the initial starting capital gave him a financial backup that allowed trader A to wipe out 15 times in a row and still have his starting capital. After a few months trader A saw that the system performed well, and as he had already generated a decent amount of money he decided to double his initial starting capital, generating double the profits he had before. After trading 1 month with the higher starting capital his profits were again like when he started to trade. He could again put away 15 times the initial starting capital, but this time that capital was double from the previous one. Trader A was very happy now, could live good, but he would never be a billionaire. But trader A was more interested in quality of life then in a stressful life with capital he probably could not handle emotionally and maybe also psychologically. Trader A still does not know if he was lucky or had the necessary knowledge and skills. He did around 5,000 trades which would logically be enough to show it was not just luck. Luck will not last 5,000 trades and 10 years of daytrading. But he does not have to break his head on that anymore. It is for 100% sure he will never go broke because of the capital management he uses. The price to pay for that insurance was to give up the chances to become a billionaire. Becoming a billionaire would make trader A a very rich person on the graveyard, but with his actual profits he can do whatever he wants to do (within reasonable limits). So why make life complicated if you can keep it simple. The way trader A trades, took away all problems that a trader can encouter: stress, emotions, psychological problems, wipe outs…