An experiment

[MrGecko]

What's up mate? You worried you haven't got any textbooks handy on this topic to copy out set questions and pretend it's your own work? LOL!

P!ss off Bramble, I had to take you off ignore to read what you had said. Pffft.

1) If you tell me you taught everything you know yourself from first principals, without any form of education whatsoever, I will call you a liar. Moreover, I made explicit my references and qualified that particular post by saying it is easy once you have been shown.

2) Perhaps you might add some tangible contribution to the thread. Initially I had considered how I might hedge said strategy, as a series of daily options - hence making the samples daily, rather that hourly. Since then, I had the idea that taking the IV from ATM Dow options and working out the IV - Historical Vol. premium, I might be able to work out hourly historical volatility and then apply this premium to the hourly data... I would then treat the hourly data in exactly the same respect as daily data, which gives me a groundwork to build a solution.

Monte Carlo is a possibility, barrier options are a possibility, Binomial / Trinomial trees are a possibility, Lookback options are a possibility (and, so far, I think the most suited - but being OTC I have never bothered to learn anything about them. By learned I mean reading books and doing exercises set by the Giants of the past, rather than derive all from first principals). I would prefer a closed end solution but I don't think one exists, because one must "rollover" the payout from the prior hour if neither limit is reached. I think that setting some limit on the length series might make the problem more managable, treating the series of options as one big european, has some merits.

This is a trading forum, not an aerodynamics or coin-tossing forum. How would you hedge / price the above strategy?

 

[MrGecko]

QUOTE

Well no-ones eating pork anymore, GO LONG!

 

[TheBramble]

P!ss off Bramble, I had to take you off ignore to read what you had said. Pffft.

1) If you tell me you taught everything you know yourself from first principals, without any form of education whatsoever, I will call you a liar. Moreover, I made explicit my references and qualified that particular post by saying it is easy once you have been shown.

2) Perhaps you might add some tangible contribution to the thread. Initially I had considered how I might hedge said strategy, as a series of daily options - hence making the samples daily, rather that hourly. Since then, I had the idea that taking the IV from ATM Dow options and working out the IV - Historical Vol. premium, I might be able to work out hourly historical volatility and then apply this premium to the hourly data... I would then treat the hourly data in exactly the same respect as daily data, which gives me a groundwork to build a solution.

Monte Carlo is a possibility, barrier options are a possibility, Binomial / Trinomial trees are a possibility, Lookback options are a possibility (and, so far, I think the most suited - but being OTC I have never bothered to learn anything about them. By learned I mean reading books and doing exercises set by the Giants of the past, rather than derive all from first principals). I would prefer a closed end solution but I don't think one exists, because one must "rollover" the payout from the prior hour if neither limit is reached. I think that setting some limit on the length series might make the problem more managable, treating the series of options as one big european, has some merits.

This is a trading forum, not an aerodynamics or coin-tossing forum. How would you hedge / price the above strategy?

What a load of waffle! But no surprise there.

Regurgitate buzzwords and book titles and keep those those tired, worn-out old concepts coming – it’ll keep the newbies impressed and keep those vitally important fly-dirts attaching themselves to your posts from your rep-buddies. LOL.

You never put me on ignore mate. You’re too desperate to catch any mention of your name and you’re terribly afraid I’d say something that would make you look stupid, or horror of horrors, like there was something upon which you didn’t already have a terribly important opinion, if you didn’t respond to immediately.

But anyway, off you went once again with all your blather and all this guy was looking for was a simple response to a simple strategy. That you, me, others might consider the strategy might not fly is beside the point. I felt it was interestingly and refreshingly devoid of any bullsh!t to warrant further review and some suggestions, which I have, and will continue to offer.

The one valid point you did accidentally stumble upon in your excessively verbose and self-conscious display of deliberate word-smithing (whoa! Hold me back….!) was that of those trades which hit neither stop nor target in the 1 hour period allocated. They present no problem. They will at some point hit their stop or target providing the stops and targets are fixed, and set at trade entry, For our purposes, they can be treated as closed with respect to time. The only small curve they throw into a theoretically calculated solution is where an opposing position to an existing one is opened prior to termination of the prior. In which case we have an effective stop at a smaller loss than the fixed stop amount or a profit at a smaller amount than the fixed target amount. These present issues for resolution only to the programming of a theoretical model, not for the execution of the system in real time.

Your final question asks me to suggest a method for hedging this system. Why? The guy isn’t looking to hedge his system – he wants to test his (possibly quite random) hypothesis by experimentation. If you want to do the same and you’ve got sufficient spare time to add in some of your own fun & games for good measure, there’s nothing to stop you. But make sure you keep winding in those big words and buzzwords and deeply complex trading structures and strategies to keep the newbies impressed.

The problem is mate, those of us who have been at this game a little longer than you have seen all the bright young sparks before – there aren’t too many of them who have managed to stay around. While you are quite clearly in love with yourself and all those grand concepts you like to try and confuse, amaze and impress them all with, those of us who have actually done the hard yards and (probably with more luck than judgement) found the way to make a consistently successful career out of trading have invariably found the secret, if it really is a secret, exists within the very simplicity of our systems and strategies – the germ, strangely enough – of which this one which is posed to us contains, and not in the degree to which you can display encyclopaedic knowledge of the deepest and most complex trading topics around. That’s for those who need to impress others who have no real idea what trading is all about either, but think they do, and to get jobs and to get paid by these others. For a while….

 

[Technically Fundamental]

make sure you keep winding in those big words and buzzwords and deeply complex trading structures and strategies to keep the newbies impressed.

It is quite impressive tbf... where do you being able to learn them stuffs?

 

[MrGecko]

And back on ignore he goes...

 

[TheBramble]

The Dow.
30 point stop.
75 point target.
Heads Long / Tails Short....

Why not? EURUSD or pretty much any of the major FXs would do just as well.

I still think your targets/stops are a little large for the timeframe you’re effectively trading.

There are three primary factors involved.

Getting your trades on and off within the 1 hour timeframe before the next trade comes up. The smaller the targets and stops – the higher the probability your trades will find an exit. It isn’t going to hurt having one (or more) live positions running, but where you enter a contra position (to your existing direction) you’ll simply exit that (part of the) position with a smaller profit/smaller stop.

The probability of you hitting your target compared with hitting your stop. As it’s a quintessentially random system, some would argue you have a 50/50 chance. It will be interesting should you decide to actually run this experiment, what the W:L actually turns out to be over time.

The third primary factor is the difference between your target and stop. The closer they are to each other, the greater your W:L needs to be. The further apart, you can even have a higher loss than win rate and still make a profit. The caveat to this being the need to aim to have your trades come off within the hour timeframe in which they are initiated will limit the absolute values of both these data.

I banged this through a Monte Carlo just for fun.

I ran 100 iterations of 10,000 trades for a number of combinations of W:L and Target:Stop (each combination therefore getting a million trades).

I’ll try and avoid stating the obvious, but it looks surprisingly better than even odds if you keep the Target:Stop at around 2:1 and if the W:L doesn’t go too far beyond 40:60. Outside of that it does get rather borderline at best. LOL.

Even with an overall profitable combination, you will need to be ready for the drawdown.

With a Target:Stop at 2:1 your drawdown will approximate -60 points at better than 50:50 W:L, around -180 at 50:50 and move from -285 toward the -20000 level as you head from the 40:60 toward the 70:30 area.

If you reduce the Target:Stop to say 20:15, this drawdown obviously become even more significant. Your drawdown will approximate -110 points at better than 50:50 W:L, around -240 at 50:50 and move from -13000 toward the -45000 level as you head from the 40:60 toward the 70:30 area.

Which is why I’d suggest a Target:Stop of around 2:1 which is roughly where you’re at anyway (but with perhaps reducing the absolute size of both by a factor of 2?) and keep a view on your W:L. Anything better than 40:60 should provide an overall profit. Of course, sitting through a -285 point drawdown on a demo account may not be quite the same experience as sitting through it with your own money…

While my initial response to this question was similar to many (most?) others, I’m fighting hard to stop thinking the same way I’ve always automatically thought about these things. Recent discoveries regarding the reality of probability rather than the theoretical definition of probability leaves me in a position to consider this more interesting an exercise than may superficially appear to be the case.

The fact there is absolutely no intent to use fundamental, technical or any market analysis of any kind, that there is no hint of trading against or with the crowd or utilisation of any psychological perspectives at all and it is overtly random, may cause most to dismiss it – but I’m not totally convinced that description I’ve just given of this system doesn’t to some extent rather define the activity of the market, pretty much any market, in these timeframes.

I’m keen to see how this develops.

BTW...is anyone willing to confess to have ever traded like this??? or tried a similar experiment?....

Not so far, but there’s something here that is worth pursuing, even if it isn’t immediately obvious. To me, at least.

 

[TheBramble]

And back on ignore he goes...

You've never had me on ignore, or you wouldn't have known that I was replying to one of your posts...keep digging, we're all laughing....

 

[TheBramble]

30 point stop.
75 point target.

You could take an ATR on the hourly and set your Target:Stop combination as a percentage (68% seems appropriate somehow) of that value. More chance of getting in & out if you’re in tune with current market conditions, be they narrow or wide.

PLUS

Instead of fixed hourly trades, why not let the market decide trading frequency as well. Make the entry for trade N+1 be dependent upon the completion of trade N.

You’ll then be using current market dynamics to tailor your target expectations and frequency of trading. More trades when it’s active, less when it’s quiet. Bigger targets when the action is strong, smaller targets when it’s light.

Just a thought.

 

[Hotch]

Recent discoveries regarding the reality of probability rather than the theoretical definition of probability leaves me in a position to consider this more interesting an exercise than may superficially appear to be the case.

What discoveries Bramble?

 

[TheBramble]

What discoveries Bramble?

Sort of started covering that in another thread on basic probability.

 

[Hotch]

Sort of started covering that in another thread on basic probability.

There are no revelations in that thread, just you spouting on that the chance of getting a heads on a fair coin if you've had 1 million tails in a row isn't a half. You know...bull****.

 

[SSINGH]

What would be more significant....

the 50/50 coin toss determining direction

OR

target / stop loss ratio

 

[TheBramble]

What would be more significant....

the 50/50 coin toss determining direction

OR

target / stop loss ratio

You don't have any control over the direction if you're using a random generator (coin toss for instance) to select it. So that has no significance.

The spread between target and stop is significant - I am suggesting around 2:1 which is almost where you plan to be anyway (75:30) 2.5:1.

The absolute size of target and stop is significant. I was suggesting using something more dynamically 'approriate' to the market being traded. Not much point having a 75 point target on an instrument which has an ATR of 10 if your imperative it to get the trades on and off within a given timeframe. If you're happy to allow the trade to take its own sweet time, there is less of an issue with absolute target/stop size.

The relationship between them (target and stop) is paramount.

 

[TheBramble]

There are no revelations in that thread, just you spouting on that the chance of getting a heads on a fair coin if you've had 1 million tails in a row isn't a half. You know...bull****.

My mistake.

Stick your head back up your ass and carry on whistling.

 

[SSINGH]

You don't have any control over the direction if you're using a random generator (coin toss for instance) to select it. So that has no significance.

The spread between target and stop is significant - I am suggesting around 2:1 which is almost where you plan to be anyway (75:30) 2.5:1.

The absolute size of target and stop is significant. I was suggesting using something more dynamically 'approriate' to the market being traded. Not much point having a 75 point target on an instrument which has an ATR of 10 if your imperative it to get the trades on and off within a given timeframe. If you're happy to allow the trade to take its own sweet time, there is less of an issue with absolute target/stop size.

The relationship between them (target and stop) is paramount.

I hear ya!

i was thinking that i would let the trades stop out as set by the target and s/l

the aim here is to be profitable....so will re-think the instrument....and re think the t : s/l ratio.....

suggestions are welcome

 

[Technically Fundamental]

This seems like b*llocks to me.

What if your market is blatantly in a bearish trend and the coin is telling you to go long? Or if you filp short on a double bottom. This only has a chance of working if you pick your trades - in which case you should just trade normally because you're just 50-50ing yourself out of profit, choose a volatile market or use this coin technique in a sideways market. The last two are just gambling however you cut it.

I'd also say each trade would have to be managed individually and not by a stanard t:s/l or its just going to lose.

 

[TheBramble]

What if your market is blatantly in a bearish trend and the coin is telling you to go long?

You ever traded a ‘blatantly bearish trend’ short and had your stop taken out? Ever?

Or if you filp short on a double bottom.

So, every double bottom you’ve ever traded Long has gone on to make a profit? Don’t think so. Double-bottom, like every other chart ‘pattern’ works as often as it doesn’t.

 

[rathcoole_exile]

This seems like b*llocks to me.

What if your market is blatantly in a bearish trend and the coin is telling you to go long?

because a bear market never has retracements or bounces ?

 

[Technically Fundamental]

True. But to me it just seems that on some trades, in terms of probability, it just seems like you'd be cutting odds that are already stacked in your favour in half.

 

[Technically Fundamental]

Okay what if its directly after a retracement or bounce... would you still go long? or the double bottom is hourly at at a newly formed formed resistance turned support or at a new low after some bad news? would you still go short?