Three possible outcomes: up, down, flat

Discussion in 'Strategy Development' started by hii a_ooiioo_a, Jan 16, 2003.

  1. Here's a game that can be a fairly good analogy of the stock market, which has three possible directions: up, down, or flat.


    This game is usually described in exaggerated terms as "elegant" or in this version "thrilling". This game is in fact neither elegant nor thrilling. It is exceedingly simplistic, and dull, and can be exasperatingly pointless. The only thing that makes this game potentially "thrilling" is the large amounts of money that can be won or lost in a single wager by people playing it.

    Just so, the stock market is usually described in exaggerated terms, when in fact it can be simplistic, exceedingly dull, and exasperatingly pointless, and is only interesting for the most part on account of the large amounts of money that can be won or lost on it.
  2. So what are you suggesting exactly?
  3. That perhaps learning to master the game of Baccarat could be a useful training for succeeding trading the stock market. Or vice versa.
  4. man


    isn't that rather similar to black jack?
  5. qdz2


    hii, you and I get along. Any where any time, there always are three posibilities to us, except you are trying to manipulate i.e. move a market and have the capability to do so.

  6. I think the parameters are a bit different. Statistically speaking, you could look at any one Baccarat game and say with absolutely certainty that the odds of X happening is Y.

    I don't think the stock market falls under the same domain, especially when you consider that it is much more diverse (arb opportunities, etc).

    Perhaps the biggest difference is that, statistically speaking, any Baccarat casino has a negative expectation over a large number of trials whereas participation in the stock market could be positive expectancy if you are in a position to leapfrog over the efficiency within the market (via superior execution system, speed, quotes, inside information, past trading knowledge, etc).
  7. man


    IMO your are right in the way you see the difference in the certainty of the expectation value of a bet. yet you do not mention the enormous impact this way of thinking had on technical trading operations. it was the principles of black jack trading that made the CTAmania of the eighties and early nineties, when many professional black jack players had to look for new sources of income because the casinos banned them and their techniques or made these approaches inefficient.

    the whole idea of multiasset, multitimeframe, multistrategy serves one goal: stabilize expectation value and consequently bet leverage on it, according to the amount at which this stabilization could be achieved.

    IMO this is the main difference between a single day trader and a trading operation: diversify towards stabilized expectation value. hence even when this stabilization costs expectation value it might be still a good thing if this effect is offset by even more stabilization.

  8. Here is where I believe the "elegance" of this game comes in. It is precisely the sort of thing you are very clever at. Baccarat is extremely similar to the Monty Hall puzzle that you explained to me.

    The key to solving this game is pretty much summed up by Man's response. The "elegance" is in the strategy of placing your bets, as Man described.
    I will let you figure it out for yourself. Remember, the Monty Hall puzzle is very much like this one. You can solve it.

    And maybe, somehow we actually will be able to apply this solution to the stock market eventually.
  9. Of course the one thing that is different in cards and dice is... the cards and dice are not controlled in any way by humans. The stock market is.

    Prices do not appear randomly... uh oh the random market theorists just woke up... and then we respond to them. Price is influenced by our responses. The dice and cards are not.

    For risk management, yeah there is correlation. Understanding when to press and when not to press, riding a "trend" etc. Those ideas can be worked with in the casino games.
  10. The dice and cards would therefore be simpler to use random theory on successfully. Which may be much easier than trying to predict the effect on prices of people's reactions, which are less predictable because there are too many outside factors affecting them.

    The keyboard is mightier than the pen . . . unless you're out of printer ink
    #10     Jan 19, 2003