my journal 3

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Old Jan 16, 2012, 11:06am   #127
 
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Re: my journal 3

travis started this thread Damn, a discretionary trade:
snap1.jpg

One of mine. First one in a year. I couldn't hold it. Today the systems are not trading (US holiday), but some markets are half open, I hadn't slept, I looked at it, and the NG was losing 4% on an early Monday morning, with gap down.

It looked like it was coming back up (going up and down, forming a horizontal support line), so I just went long on it.

This is what happens when I can't sleep and I skip work. Once by staying home for 3 weeks, I more than tripled my account, from 8k to 26k (then one month later I blew out the account). But it's definitely something unhealthy that I want to avoid.

It was stronger than me. It happened. I saw the opportunity, actually I was looking for it. I found it, and it happened: I placed a discretionary trade.

That's why I'll stop doing math for a while, a week or more, stop staying so much at the computer and try to sleep. That's the number one problem I have right now, of those that I can solve.

Now I am up, waiting for price to take off (the famous "it can't fall any lower" trades).

[...]

Forget about it. I closed it (profit of one tick). Let's pretend it never happened.
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Old Jan 17, 2012, 5:58am   #128
 
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Re: my journal 3

travis started this thread

MADtv - Wikipedia, the free encyclopedia
Watch MADtv online (TV Show) - download MADtv - on 1Channel | LetMeWatchThis
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Old Jan 17, 2012, 3:04pm   #129
 
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Re: my journal 3

travis started this thread

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Old Jan 18, 2012, 1:01pm   #130
 
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Re: my journal 3

travis started this thread Very related to automated trading:
Watch Moneyball online free 2011 - download Moneyball - LetMeWatchThis



Peter Brand (Character) - Biography

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Old Jan 18, 2012, 11:18pm   #131
 
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gambler's fallacy keeps bothering me with regard to drawdown

travis started this thread Gambler's fallacy - Wikipedia, the free encyclopedia

snap4.jpg

Today wikipedia doesn't work, so I had to take a snapshot very quickly, because after a few milliseconds it redirects to their petition.

Both with coins and with drawdown, gambler's fallacy keeps polluting my reasoning.

A few days ago, in a long post, I've established that, as far as my trades are concerned, the probability governing losses and drawdown corresponds to "sampling with replacement":
Sampling With Replacement and Sampling Without Replacement

In other words, if your chances of winning (always as far as my trading systems - not with all trading systems, cfr. long post) are 2 out of 3, and you incur a long series of losses, the next trade is still as likely to be a win or a loss. This is very important because it affects the gambler's fallacy problem i was mentioning.

Since this "sampling with replacement" also applies to coins, which are simpler, and yet are the same as my trades in this aspect, I will talk about coins.

It is clear to me that after you toss a coin, if you get a head, the next toss has still a 50% probability of resulting in tails: the probability of tossing tails doesn't get increased by being preceded by a head. This is what probability theory says, and it is also what statistics of coin tosses say. And it makes sense to me.

So if it is true after one head, once again probability theory and statistical results say that it stays true after ten consecutive heads.

But this is where it gets complicated to grasp, or rather where I tend to forget it, and it tends to be counter-intuitive, with regard to coins and even more to drawdown. Because, even though you know this, you also know that the probability of getting 2 heads in a row is, from the start, only 25%. And to get 3 heads in a row, it is 12.5%, and for 4 heads in a row the probability (from the start) is half, which is 6.25%.

So what becomes counter-intuitive and bothers my thoughts is this: knowing that there is such a small chance of drawdown (in coin tosses and in trades) exceeding that streak of heads/losses, you feel like saying to yourself "why shouldn't I jump in at the tenth consecutive loss/head?".

While you know that after ten heads, the chance is still 50% (similar situation for trading), you also know that the chance of that happening, from the start, is one in 1024.

So I keep on saying to myself "but hey, it won't help you" and then again "but how likely is it to happen?", and then again "but hey, it won't help you"...

This is particularly annoying with trading, because I happened to, randomly, resume my trading after a week of drawdown. And then I survived without much damage another week of drawdown, and this we're in, is the third week of drawdown. I looked at my previous stats, and this is very rare, and usually there's no more than 2 weeks in a row. So I feel lucky to be at this point with my capital still intact, but this - i realize immediately - corresponds to gambler's fallacy, because, as established, my trades are not related to one another, and wins and losses do not take place in an alternated sequence.

So, once again, I've clarified previously and here again, that it makes no difference whether we start trading a system (or portfolio of systems) after a series of losses or wins, and that it makes no difference whether we bet on tails after a series of heads, but, after saying this, so many times, I look at my trading systems and I feel reassured by the fact that there's some drawdown behind me.

I can't help it, and I don't understand how I can at once understand the theory, prove it to myself empirically, and yet still not believe it.

Maybe this has something to do with the fact that i've proven it with coins, by using excel, but I haven't been able to prove it, despite resampling, with my systems. I haven't been able to produce a streak of 100 years of losses but just 3 months, so I am given the false impression that the most losses can last is 3 months, whereas, if the sample was large enough, there would be instances when they last 100 years.

So, all I can do for now, is write a post here, every once in a while, to remind myself.

With coins, I've got this workbook to clarify it to me:
assessing_probability-theory_vs_practice.zip

I've never found anything so simple and yet so hard to understand. It's so simple that it's a pleasure to think about it. It's so hard that you forget it once a day.

Ok, I just explained the whole thing, and I have already forgotten it.

Let's get back to my trades.

I roughly have a probability of 3 out of 10 of getting a losing week on this whole sample:

snap1.jpg

Since the losing weeks are randomly distributed (if I knew otherwise, I would simply disable trading during those weeks), every week there's a 30% chance of getting a losing week.

So, if all these assumptions are true (we can't find a better assumption, so we have to assume things as precisely as possible), this only allows us to say that after a losing week (just as after a winning week) we have a 30% probability of getting another losing week.

The fact that, on my sample, there haven't been any 3 losing weeks in a row, only means the sample is not long enough.

Their probability is 0.3 times 0.3 times 0.3 = 0.027. This means that every 100 weeks, there's almost 3 chances of such a losing streak happening. Do I have 100 weeks in my sample? Nope. Of course I also have the long back-tested sample, and I certainly have those losing streaks in it.

So, let's recapitulate.

The fact that I don't see any streaks of four weeks in a row doesn't mean they don't happen. The fact that I have behind me 2 unprofitable weeks in a row doesn't protect from a third one any more than if I had 2 winning weeks in a row behind me. It's all just a false feeling of security. This week I still have a 30% chance of having an unprofitable week.

Despite all this repetition, it still isn't clear enough, for whatever reason, and I know the gambler's fallacy will resurface in my mind, as it does in almost everyone's mind. E.g.: when people say that they're not likely to get a second tumor or be struck by lightning, because it already happened once - instead the chance is just the same as the first time it happened.

Yeah, the chance of three red weeks in a row is 3%, but not once two red weeks have already happened. Then the chance of it happening a third time is just that same 30%. Each time it's the same 30% that gets multiplied by itself.

[...]

I don't know why but after all this explaining and repeating, I still have a feeling of safety by having two negative weeks right behind me. I don't remember other situations where everything is telling me things are one way, and instead I keep thinking that they're the opposite.

Maybe it's close to the feeling of god. You feel there's a god, from years and years of inner thoughts, but then your reasoning tells you there isn't, but then you feel like there's someone listening to your thoughts, and instead it's just you. You feel there's someone else, too, and instead there's nobody. The same applies to this feeling of safety that you get from being struck from a lightning and surviving, or from surviving a drawdown, or from starting to trade after a drawdown. It's probably all imaginary.
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Old Jan 19, 2012, 7:35pm   #132
 
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Re: my journal 3

travis started this thread Doing a whole lot better after today, because over 1000 dollars were made, so this means that if I do not scale up, as I won't do, the inevitable (sooner or later) drawdown is 1000 dollars farther from blowing out my account, and this is a lot. Tomorrow I will do the weekly update tomorrow, and show the ongoing equity line. For now the difference of over 1000 dollars in capital means going down one step in risk of blowing out the account:

snap1.jpg

Whereas before, a 3000 dollars loss would have blown out my account, now I would need a 4000 dollars to stop me from trading (it wouldn't really blow out the account, but brings me below the trading minimum requirement).
According to relativized back-testing, by going from a capital of 4000 to a capital of over 5000, I brought my probability of survival from 88% to 93%. So, I could still blow out, especially considering that the future is worse than the past, but I am farther away from it in terms of probability.

One post earlier, I was talking about the gambler's fallacy, but even without that faulty reasoning that keeps haunting my thoughts, I can say this. The chance of having a third negative week in a row, counting from the start, was 0.3^3 = 2.7%, and it didn't happen. Counting from a week ago, the chance of it happening was 30%. I think I can say this much, coherently and without contradicting any probability theory. Of course, the only thing i am not taking into account is that past performance is never a guarantee of future performance (there's a tendency to do worse, as explained recently), and I am not mentioning it because, given that right now I cannot assess it with any formula, it's hard to make it fit into probability theory. I hope I'll find a theoretical way to assess it and describe it.

From experience, if the chance is 30% in the past, in the future, it becomes about 40%. This would mean, for 3 negative weeks in a row, a calculation that goes like this 0.4^3 = 6.4%.

Now the challenge for me will be to not rush things, by either scaling up or engaging in discretionary trading, both of which would have the effect of destroying my account. When things don't happen at all, I can be patient and wait months, as I did recently. When things start happening, like now, all of a sudden I get into a frenzy and feel tired of waiting and feel like rushing things. It's like when you are in the street on your way home and you can hold your urge of pissing all the way to the house, and then once you shut the door, you almost feel like pissing in your pants. That's because, unconsciously, as soon as you feel that something is possible, you stop holding your urge, and it almost overwhelms you. Until it's impossible, instead, you easily hold it. I remember it happened at school with the bell. You can stay in class, easily, until the bell rings. Once it rings, you feel the irresistible urge to get up and leave. And yet, it's so irrational, because you sat there for hours, without complaining and one more minute is not going to make a difference. But no one can hold it (you can see it in movies, too).

So, I should now try to hold my pissing money away, because the bathroom is still not at hand. The money is in the account, but it can't be relied on, it can't be spent, it can't even be considered part of the capital: it's the profit cushion necessary to withstand the drawdown. I shouldn't even resume taking taxis - as much as possible I should take the subway. Too many times, after making money trading, I treated people to that Japanese restaurant near the office. If you put yourself in a situation where you consider your trading profits as money in your pockets, you're not going to be ready for the drawdown when it hits you, and then you will try to make up for your losses, and then you will lose even more. When your capital is everything like in trading (it's different when, like for most people, you don't have to invest it), saving is everything, and it should be spent in % terms, like spending a % that doesn't affect it. Like 1% for example. Ideally 0%. I should try paying for the server from my other account, rather than from the IB one.

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Last edited by travis; Jan 19, 2012 at 11:54pm.
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Old Jan 20, 2012, 2:29pm   #133
 
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Adizes Methodology (PAEI)

travis started this thread Adizes Methodology (PAEI) - PAEI - Structures of Concern

A trader friend told me to check out this classification of "business personalities" (your personality at the workplace). At the moment I am looking for a test. Probably one of these will work:
PAEI Software - ttware.com
PAEI Software 2.0 download free - PAEI model of Adizes Software, Framework Mana



I will look into it further once I get home.

[...]

Taxi driver strike. I could not get home with a taxi so I took a bus, the number 30, but in the wrong direction. So I did spend only 1 euro, but it took me 2 hours to get home.

You know what. I don't need to take the test, because well, first of all, none of the links I found works. Second of all, I am not going to install a "free trial" unknown software to just take a personality test. Third of all, the business type I am is one who doesn't need coaching or tests.

At any rate the first link, provided at the top of the page, is quite interesting:
Adizes Methodology (PAEI) - PAEI - Structures of Concern

Oh, and the youtube video actually had nothing to do with this subject. I pasted on the post from work, and when I am there, I cannot see youtube videos.
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