The Market's House Edge! :(

Discussion in 'Strategy Building' started by Remiraz, Aug 9, 2005.

  1. Remiraz


    After much calculating, i find Casinos to have better odds! :eek:

    Casino European Roulette Wheel betting on Black/Red = 18/37 chance to win or 48.65% winners.

    Casino house edge = (50 - 48.65) + (51.35 - 50) = 2.7%

    Now for trading. Assume the minimum 1 tick spread, 1:1 risk:reward and random entry (fair system):

    -- Profit Target 5 ticks, Stop Loss 5 ticks. 6 tick move vs 4 tick move. 40% win to 60% loss =
    20% house edge! :eek:

    -- Profit Target 10 ticks, Stop Loss 10 ticks. 11 tick move vs 9 tick move. 45% win to 55% loss =
    10% house edge! :eek:

    -- Profit Target 20 ticks, Stop Loss 20 ticks. 21 tick move vs 19 tick move. 47.5% win to 52.5% loss =
    5% house edge! :eek:

    -- Profit Target 30 ticks, Stop Loss 30 ticks. 31 tick move vs 29 tick move. 48.33% win to 51.67% loss =
    3.34% house edge! :eek:

    -- Profit Target 50 ticks, Stop Loss 50 ticks. 51 tick move vs 49 tick move. 49% win to 51% loss =
    2% house edge! :eek:

    No wonder the pros always play long term charts! :eek: The House Edge is incredible for daytraders! No wonder they say trading is negative expectancy!
  2. I don't know who you refer to when you refer to "they" in the above statement. Your syntax is a little vague also when you say "the house edge is incredible for daytraders." I think you mean to convey that your opinion is that day traders, in fact, do not have the edge, and the firms do.

    While its true that commissions (even though in currency trading commissions technically do not exist, but they are a part of the spread) can change a trader's edge from positive to negative (expectancy), that doesn't preclude all day trading to a game where the day trader's always lose.

    I think you would help yourself if you define your terms more specifically. What is a day trader, to you? For me, a pure daytrader goes home flat at the end of the day, on one end of the spectrum, then all formats and styles are thrown in there as you move toward the pure long term gent.

    Who says daytrading "is negative expectancy?" If you found a method that had a positive expectancy for day trading, who would you believe, yourself or "they?"

    My first year trading, well, my first 6 months, I made $25,000.00. However, I paid $40,000.00 in comms. At that point, I would have agreed with "they" more. However, since then I have done better.

    If "they" is the majority, to you, then "they" are right. Most traders lose, period. Just like in pro sports, only a few make a living compared to those who try. The next fresh group of 100 hopefuls will only have 9 or 10 make it, and 90 go find something else to do for money.

    Footnote: I don't really agree that you ahve done "much calculating." A few examples do not constitute a rigorous look at data. You picked a few random examples, and even worse, had "random entries" and called that a "fair system." Well, nothing in trading is fair. If you wanna trade a system that gives you that kind of return, go ahead, but I urge you to do MUCH MORE calculating, and find something that works, and that you can trade based on your personality.
  3. Actually I think you missed his point. He used the "spread" to calculate the house "edge". He didn't factor in commissions. So the bottom line is that had he factored that in there is a bigger edge against the trader.

    But I do agree....personally I wouldn't be playing a "random" method. I'd like to be much more selective about my entries and exits.

    Finally, I agree with one other thing. I think the game becomes much more difficult at very short term moves and/or scalps. My opinion. And I think a part of that is the spread plus commissions. I'd rather play a bigger game myself.

  4. AaronCapps

    AaronCapps Global Futures

    Your calculations show a great example of what kind of handicap traders may give themself depending on their trading strategy. Typically though the traders that go for smaller targets and smaller losses end up having higher win ratios to offset that handicap. Or at least hypothetically they do.
  5. Remiraz


    The mathematical definition of a "fair system" is Expectancy = 0. One case of a fair system is a coin flip game (50:50) with 1:1 payout.

    Approaching any model with the rules of playing in a fair system is a great way to figure out your advantages/handicap without influence by luck/chance. (Some testers might make from one to ten-twenty lucky trades and think they have lots of advantages)

    Regardless of what method you trade the market with, those are the basic negative edge a trader have to beat to be profitable. Same way BlackJack card counters try to beat the House Edge of 0.5%, if they do they make money.

    As you can see, the 1 tick spread itself is a major handicap. 18% of traders could still beat it though. But the smaller timeframe you go, the harder it is. Unless you're an expert at Limit Orders.

    So yes, you completely miss the point. :D
  6. Remiraz,

    Good points and something new traders should keep in mind. Also guy2 posted a nice study several months ago, outlining the edge needed.

    Which is why I don't understand why there isn't a popular uprise about the ES still having 0.25 ticks (vs 0.1 of pit), in addition to the fact that daily ranges have shrunk to 1/4th of the ranges between 1998-2002.

    Ofcourse, here in ET there are also people teaching others how to DAY-trade ES using MAs and trendlines...
  7. There will never be any ''uprising'' as long as the crooked futures industry succeeds in fooling new idiots that there is fortune waiting for them.

  8. Remiraz


    heh. wonder why ES is still high vol. most vol comes from the pits?
  9. Grob106


    Well Remiraz you have it all figured out now.
    Whew ! you can go back to Mom and tell her she's right and get that corporate job. Good bye. We'll miss you.
  10. Remiraz


    Since you think you're so smart maybe you can answer this:

    Why do everyone think that having a negative edge using random entry = you cannot make money from the market? :D

    Btw i'm getting that corporate job anyway. :eek:
    #10     Aug 15, 2005