Direction is everything.

[meanreversion]

Well, maybe not an opinion but even a mechanical system has to make a directional assumption.

Well yes, a trend system will sometimes be long or short, but that is unconnected with the system designer/trader having an opinion on the likely outcome. On my longer term trend system, I'm running at around 30% winning trades, so typically when a trade is entered, I just assume it will get stopped out!

 

[Hotch]

It depends how you define direction. I don't have to know whether today will be an up or a down day to make money.

Either what your saying is hardly profound, or it's wrong.

Overall direction doesn't matter, only that it hits your target BEFORE your stop. Obviously though, you can define it hitting your target as the directional move.

If you think the market is going up 1000 points, and it does, but it hits your 10 point stop first, you're just as screwed as everyone who thought it was crashing.

 

[barjon]

Well yes, a trend system will sometimes be long or short, but that is unconnected with the system designer/trader having an opinion on the likely outcome. On my longer term trend system, I'm running at around 30% winning trades, so typically when a trade is entered, I just assume it will get stopped out!

aye, that's what i mean - assumption does not equal opinion.

jon

 

[meanreversion]

Never assume, it will make an ass out of u and me.

Opinions are like assholes, everyone has one.

 

[wackypete2]

Interesting debate. Generally, trading with the trend is easier, but successful scalpers can pick off nickels and dimes in the lower TF's regardless of which direction the market will ultimately head. Of course, unsuccessful scalpers GET picked off.... no one said it was easy!

Peter

 

[spinola]

hehe @ the "uncaring" lot , its like saying chuck some ingredients in a bowl and hope it makes something edible to eat ! That's not my idea of becoming a professional chef !

Pot Noodle Heads !

 

[bedsit]

Fair enough, that's your approach, but there are several very large and successful hedge funds out there (BlueCrest, Winton, JWHenry) which operate mechanical trend systems with zero opinion as to direction. Ergo, the essence of good trading cannot be having an opinion on the direction, because if it were, they could not exist.

It's a funny thing about hedge funds - they are considered very successful if they make 20% per annum.

 

[robster970]

Argh, please don't start with the coin-flip thing again, that's been debated to death on another thread.

I wasn't trying to go down that road. I am genuinely curious about how a directionless strat based purely upon an increase in volatility can work. What I can't get past is that the win% could not be greater than 50% if the volatility causes directionless, stochastic behaviour. I'm not doubting it doesn't exist merely trying to understand the mechanics.

 

[meanreversion]

It's a funny thing about hedge funds - they are considered very successful if they make 20% per annum.

It's return as function of drawdown, i.e. 20% return with 10-15% drawdown would be ideal.

Now, there are clearly many people on this website who have multiplied their money a few times over, but prior to that have wiped a few accounts (100% drawdown) and probably have 50%+ drawdown on their current accounts whilst topping it up from salary.

A hedge fund can't afford a 100% drawdown, look at LTCM..

 

[meanreversion]

I wasn't trying to go down that road. I am genuinely curious about how a directionless strat based purely upon an increase in volatility can work. What I can't get past is that the win% could not be greater than 50% if the volatility causes directionless, stochastic behaviour. I'm not doubting it doesn't exist merely trying to understand the mechanics.

The idea is that moves continue much further than they should, some kind of fat tail thing in what is supposed to be a normal distribution. We all know bubbles exist, this is a trend being taken too far.

If there were no trends and markets were truly random, the approach would not work.

 

[robster970]

The idea is that moves continue much further than they should, some kind of fat tail thing in what is supposed to be a normal distribution. We all know bubbles exist, this is a trend being taken too far.

If there were no trends and markets were truly random, the approach would not work.

Gotcha - it's the Kurtosis vs the normal distribution and how the difference can be used to make money. Ta.

 

[meanreversion]

Gotcha - it's the Kurtosis vs the normal distribution and how the difference can be used to make money. Ta.

And the underlying driver of trends is human emotion - fear at the bottom, greed at the top. Thus the idea is that as long as human behaviour doesn't change, there will be trends.

 

[scose-no-doubt]

I wasn't trying to go down that road. I am genuinely curious about how a directionless strat based purely upon an increase in volatility can work. What I can't get past is that the win% could not be greater than 50% if the volatility causes directionless, stochastic behaviour. I'm not doubting it doesn't exist merely trying to understand the mechanics.

What about %relative long-short in two markets that have the same/similar macro driver... more capital flows more quickly into one causing a bigger move and downside is hedged by the other? Or what about being long/short liquidity :S
You'd need hella information to trade that way though I think. And a lot of moolah.
Could trade options to be long short/volatility.
Could you not also trade volatility through options?
Agree with you that it looks impossible to be profitable trading outright in the volatile market itself.

 

[meanreversion]

As far as options go, I've seen many instances of people calling the direction right, placing the trade with an option, and still end up losing money. With that kind of discretionary trading, timing is probably equally as important as calling the direction.

 

[scose-no-doubt]

yeh those greeks are a nightmare. overlook one thing and get eaten up

 

[JRP2891]

It's a funny thing about hedge funds - they are considered very successful if they make 20% per annum.

The majority of hedge funds are only looking to beat the benchmarks in order to retain their clients and charge them management fees which amounts to a guaranteed return for the fund. Most investors are put off by larger yet more volatile returns, even though the hedge fund manager might have a 30 year track record. Therefore the hedgefund that could pursue an absolute returns strategy and undoubtedly make their clients 80-100% a year, albeit with a chance of a 50-60% drawdown, chooses to reduce their volatility and as a result their returns, in order to appeal to the Wall Street investor who is only worried about beating the S&P 500.

 

[meanreversion]

The majority of hedge funds are only looking to beat the benchmarks in order to retain their clients and charge them management fees which amounts to a guaranteed return for the fund. Most investors are put off by larger yet more volatile returns, even though the hedge fund manager might have a 30 year track record. Therefore the hedgefund that could pursue an absolute returns strategy and undoubtedly make their clients 80-100% a year, albeit with a chance of a 50-60% drawdown, chooses to reduce their volatility and as a result their returns, in order to appeal to the Wall Street investor who is only worried about beating the S&P 500.

Yes... this is a re-hash of the "hedge funds only make 20%, I doubled my account in a week" type argument.

Return divided by drawdown, that's what it's all about. How much are you prepared to lose in order to get a certain return. For hedge fund investors, the answer is usually "not very much" and their returns are commensurate with this tolerance of risk.

 

[barjon]

the asides were a good laugh but i've had the brush out - sorry guys.

jon

 

[Splitlink]

As far as options go, I've seen many instances of people calling the direction right, placing the trade with an option, and still end up losing money. With that kind of discretionary trading, timing is probably equally as important as calling the direction.

Time wastage is the name of the game with options. The brokers tell the punters that the beauty of them is that you know, always, how much you are going to lose. The reality is that most lose all the time.

Don't you see the similarity to close stop losses? The market loves them. It's like having glass doors so that they can see you coming.

 

[scose-no-doubt]

no fun + snipping lulz threads - snipping scam threads = barjon