Winning Odds

Discussion in 'Trading' started by Here2learn, Nov 17, 2009.

  1. Obviously, there are many many more consideration in trading than simply betting Red/Black. But in its simplest form, stock prices either go up, or down.

    Does this make the chance of blindly picking a winning stock the same odds as flipping a coin? Or, am I missing something. Short term/Long term?

    If that were the case, then blindly choosing shorts and longs could be profitable with proper money management and diversification. Correct?

    If so, then having even a little edge like looking at even the simplest technical or fundamental analysis should definitely make a trader profitable. Yet, so many loose.

    What is missing that voids the 50%/50% theory, Red or Black, Coin Toss?

  2. As a general rule one cannot beat a game where there is no edge via money management rules. For example, read up on the Martingale system and why it doesn't work even though it appears to in the short run.

    Flipping a coin to determine your position is by definition a system that has no edge. You're just as likely to be on the wrong side as the right side.
  3. In flipping a coin, the probability of your system is fixed (50/50 in the case of a coin flip) and doesn't change. It's the same in roulette or any other game of chance where the system parameters are completely defined (# of cards in the deck, # of spots on the wheel, etc). In the market, your probability is constantly changing with market conditions, and could be skewed one way or another.
    In a trending market, it could be 55/45 or 90/10, depending on the strength.

    I think proper money management would just prolong the agony in this case.
    Besides, if you have the skill/discipline to implement a sound money management scheme why would you cripple your system by trading without an edge?
  4. Kap


    "yet so many lose", that is all you need to know, work from this premise, use it as a basis to form your decisions.

  5. Trading is like playing blackjack in a way that you need to know how to play to make the winning odds <b>approach</b> 50%.
  6. Slippage & commission.
  7. "I would like you to imagine a national coin-flipping contest." Let's imagine all 268 million people in the United States are asked to wager one dollar on their ability to call the flip of a coin. "If they call correctly, they win a dollar from those who called wrong." After each flip the losers drop out, and on the subsequent flip the stakes multiply. Each person has a 50-50 chance of calling each flip and approximately half of the people will lose and drop out each round. After ten flips there would be approximately 260,000 people that had successfully called ten consecutive coin flips. After 20 flips, based purely on chance, there would be approximately 250 people that had called 20 consecutive coin flips - a seemingly miraculous feat.

    The surviving callers would have over one million dollars each at that point. Press coverage and inquiries about their coin calling ability would increase with each successive flip. Several callers might even attempt to profit from their good fortune by writing books on coin calling, setting up 900 phone lines, or by sending mass mailings or spam Email solicitations offering to share their secrets with intrigued members of the public.

    As with winners of the lottery, its obvious that those remaining would have been blessed with good luck. But what if a large percentage of remaining coin flippers had a common characteristic or trait. What if a disproportionate number had came from one town or had been educated by one "patriarch." Would this signify that more than luck was involved in calling coin flips?

    It is at this point when its intriguing to compare the coin flippers to investors. There are literally millions of investors and stock pickers trying to beat the stock market. Clearly, based on the laws of probability, many will be successful in significantly outperforming the market even over long periods of time. The question is: are successful stock pickers effectively equivalent to lucky coin callers or are there some common characteristics, styles or traits among the outperformers that signify that more than just luck is involved? It is in this context that Buffett introduced the fictional land of Graham-and-Doddsville.

    "I submit to you that there are ways of defining an origin other that geography. In addition to geographic origins, there can be what I call an intellectual origin. I think you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village that could be called Graham-and-Doddsville."
  8. 1) You need to avoid all the distractions, mostly the books, advisories, and others who champion things that do not work. Elliott Wave, Fibonacci, standard TA methods and indicators, Gann, and a lot of other stuff pushed around by dung beetles.

    The belief systems in these die hard.

    2) Once you get past all this stuff, which includes the simplistic and ridiculous ideas that newbies and paper traders get into, you may start realizing that few people will ever be longterm lucrative. You will not be retireing next year or making 500% annual profits with little risk

    3) You MAY start realizing that edges are very difficult to find and keep, so uncovering something that has serious positive expectancy is the center of this. That takes a LOT of work

    4) You also realize that even with an edge, many people lose. So hopefully you realize that superior money management skills help you KEEP the gains from an edge.

    And so on...
  9. oraclewizard77

    oraclewizard77 Moderator

    It also depends on your time frame. A stock can and will go up and down. However, Buffet was able to average 15% compounded rate of return for many years.

    How did he do this? He would buy a stock where he considered the value of the stock to be high while the price to be low. Also, many of these stocks like Coke paid dividends of 3% to 5%, so even if the stock was not going up, he still made money and used that money to invest in more stocks.

    Then when he became a big shot, he was able to do what no normal investor can do which is have GS sell him preferred shares that pay around a 10% dividend. His motto is buy when there is blood in the streets and sell when everyone is happy.

    What I am doing right now is I have a longer term swing stock account and a shorter term trading account. This helps even things out.
  10. Obviously, you are correct that trading involves a choice among two things.

    You have completed step one in the reasoning process.

    Traders do not make this choice, however.

    What happens as a person becomes successful in taking the market's offer, is that a partnership is formed.

    If a person is able to listen or see the "tells" from the market, then a small bond begins in your partnership with the market. You "accept" the "tells" as being correct from your partner.

    You have discovered that the market only gives "tells" that are only one or another of the information flowing.

    Once you examine the two variables of the market and come to grips (see Traderzones not coming to grips for 5,000 posts under TZ and many more under rcanfiel. See him also try to sell to others and see him run websites for fees too) with their nature to have only one of two alternatives, you are home free.

    I call it "being a millionaire".

    Look closely and find the two variables.

    Then find their measure in binary terms.

    As you have found out, you missed the mark on price. Most do.

    You did perceive, however to measure price with respect to time to determine its direction. The direction of price is only so useful for making money.

    Money is made over time. This is a rule. Price change is required for making money and price change only happens over time.

    This brings you to the focus of making money: It is timing the markets.

    You can see that there are is only one time for making money.

    So four words are used to give the four combinations of two variables taken two at a time. P and V are the variables.

    V leads P in making money.

    A deductive hypothesis set is required to express the total relationship of V and P when the binary measures of each variable are deployed.

    The thing not understood by you and most in ET is that the measure of price is not done with opposites. What price does in a binary manner over time is unknown to you.

    You probably cannot percieve of the the two measures used for volume either.

    This is normal for most people. Not many people step into the relm where the solution to trading successfully and easily lies. Most people are, like traderzones who look for ways to make money. He speaks of ditching everything he knows about. He speaks of seeking an "edge". he screws up as says so by considering "money management" He explains that risk is propotional to funds in the market and avoiding risk is best done by using little or no capital for a position. He is correct for his mindset.

    When a person discovers the measures of the hypothesis set, then he is on his way. Two variables taken two at a time define everything.

    What emerges is one pattern. The pattern is applied symmetrically to long or short trends of price change (where money is made).

    The two applied patterns overlap by necessity. This singular and deeply rich idea also affords a view of madelbrot's discovery of the fractal nature of many things.

    You may find out how valuable your thinking has been thus far. I recognize that most people cannot take the intellectual trip to wealth. Traderzones is an authority on failure and why he and others fail. I admire people who figure out things unless what they are doing has no successful outcome.

    Look at the many people who post in ET who have slowly and steadily become OCD types. Traderzones made the list three different ways so far.

    Be very certain that the binary aspect of reasoning in trading is on the mark. Also be certain that the potential for success requires that a trder partner with the markets. There is a reasoned viewpoint that one of these ways that leads to partnering takes 10,000 hours of work. grasp the idea of spending 10,000 hours to achieve one thing: becoming partners with the market.

    Why is this never part of traderzones humorous postings? why did he leave out the trader/market partnership that is required?

    The "tells" that get "accepted" lead a new thing to enter the picture of the partnership: TRUST. When trust appears, then the trader can make use of what he is told visually.

    Why doesn't traderzones trust the markets? He has been screwed so many times is why. He is protecting himself from the markets as it turns out. He cannot even conduct a backtest of the markets and trust the results. He rejects all other's work out of hand at this point in his OCD.

    You are at choice to listen to the tells of the market. The ones to follow are binary vectors of the variables. Four "tells" always coming to you. Always avaiolable and alwqays certain because of their character (binary).

    TRUST is not available to most people. They cannot TRUST the markets. They do NOT trust the markets.

    The market is always right.

    If a person spends time with the market, he can develop a partnership. writing out the contract is a good idea. I probably should post the contract.

    Rarely in ET does a person post something that is original and thoughtful to the poster. In this thread everyone can look at your post and recognize your thinking if they choose to. Most will not.

    you do not have a dilemma to consider. What you have is an opportunity to go through a door not often opened.

    Price does one of two things at any moment in time: continues or changes in its trending. The pattern has three price moves. Two are dominant and one is non dominant. Most people will never grasp this and they will thionk as you do now. You think up and down. that has to change and most likely it will not. the door will remain closed for you and as time passes you will further nail it shut as did traderzones.

    during the three movews of price; four things happen to volume as it does its binary thing: increase and decrease are the binary things. this leads to ends: peaks and troughs.

    Were you to listen to the market it would "tell" you how volume is leading price (check out bighog's misconceptions on this) and just where the critical signals are offered in time for each profit segment.

    The pattern has been posted for years. The fractal relationships have been posted for years. Find out why the author of "Trendfollowing" thinks this is "gibberish". Find out what screwed up his mind so seriously.

    It comes down to one reason: a person does not form a partnership with the markets based upon trust. Most of these people learn failure as a consequence.

    If a person can conceive of the market being correct, then the duties of the market and the trader become defined. Neither steps over the line. each does his respective job.

    Find out why finding an edge is stepping over the line and, besides, is unecessary for a person who is able to think. Do not give up your ability, still p[resent, to think critically.
    #10     Nov 17, 2009