More trades means more risks ?

wysinawyg

Active member
186 1
Glenn,

I see where you're coming from, but it only applies if you think someone is less able to perform the trades at speed and you're basically talking human error.

i.e. two strategies both of which "should" give 500 points over a year, the first of which does one trade and the second does 500 trades. Clearly on the first system a bit of human error is unlikely to make a huge difference to the result, but on the second system you could pretty much guarantee that in practice the person would substantially underperform the theoretical.

I agree with that to an extent, although it becomes less of a factor when you are looking at reasonable sized moves as opposed to small scalps.

The flip side that grey1 is getting at is that if you expect average profits of 500 from say sytem 1 which makes one trade a year or system 2 which makes 10 trades a year, then system 2 is much more likely to give you close to 500 points than system 1 when taking any particular year. It isn't that system 1 will do less well on average (and in this case the human error part is likely to be much less of a factor) just that in any particular year you will have much more volatile results. As such system 2 can be seen as "less risky" because your chance of getting average results (rather than catastrophically bad results) is much lower.

wysi
 

Grey1

Senior member
2,186 178
Glen,

I had a mathematical view towards your statement this is why I said It was in correct.. Human error, and stuff like that was not part of the equation and I leave that to individual traders..


We must have a solid and logical mathematical view toward our strategy and once that is acheived then train ourself and our mind to stick to our rules/money management other wise we should not be trading..



regards
 

DaveGos

Active member
100 1
Glenn
"Each time you take a new trade, you take on a completely new risk.
i.e. More trades = More Risks (and higher trading costs)."

As a statement of fact that's unarguable, but providing your system is net positive then More trades = More profits, in fact the more trades you do the closer you should come to the systems winning probability, i.e with a system providing a winning probability of 50% it is quite possible over say 100 trades to produce only 40 winners but far more likely over a 1000 trades to produce 500 winners, thats Mathematics.
It may be that I am taking to simple an approach but it seems to me that fewer trades could lead to increased risk because the population of trades is not large enough statistically to deliver the number of wins that systems win probability calls for.
Of course if your arguing that more trades increases the chance of human error then thats another matter.
 

Glenn

Experienced member
1,040 118
Grey1
Quote "I had a mathematical view towards your statement this is why I said It was in correct.. "
But the maths you have mentioned was about expectancy. We have eliminated expectancy by suggesting that the two systems under comparison have the same expectancy.
Quote "...We must have a solid and logical mathematical view toward our strategy"
Agreed. Do you have a probability (maths) case to offer in respect of the two equal-expectancy systems ?

Wysinawyg
Quote "I see where you're coming from, but it only applies if you think someone is less able to perform the trades at speed and you're basically talking human error."
OK, well that seems like a rationale in support of the argument that more is riskier.
If you have more opportunities to make an error, then maybe you will. Perhaps an argument which suggests that the less experienced you are, the less often you should trade ?

However does it not also apply because of the probability (maths) argument ?

Quote "i.e. two strategies both of which "should" give 500 points over a year, the first of which does one trade and the second does 500 trades. Clearly on the first system a bit of human error is unlikely to make a huge difference to the result, but on the second system you could pretty much guarantee that in practice the person would substantially underperform the theoretical."
So again, something in support of the argument.

Quote "I agree with that to an extent, although it becomes less of a factor when you are looking at reasonable sized moves as opposed to small scalps."
Sorry, not quite with you here. Why would that be ?

Quote "The flip side that grey1 is getting at is that if you expect average profits of 500 from say sytem 1 which makes one trade a year or system 2 which makes 10 trades a year, then system 2 is much more likely to give you close to 500 points than system 1 when taking any particular year. "
OK, well that's changing the parameters a bit. One trade per year is not really trading is it ? :)
Nevertheless, the maths don't appear to agree with you.
Using my earlier trade numbers:-
Longer term trade - Chances of a 100 point win from one trade is 60%
Short term trade - Chances of 100 points from 10 trades is (60%x60% .....x60%) = 0.36%

Quote "It isn't that system 1 will do less well on average (and in this case the human error part is likely to be much less of a factor) just that in any particular year you will have much more volatile results. "
Quite likely for that example, but not a good sample size really (imo).

Quote "As such system 2 can be seen as "less risky" because your chance of getting average results (rather than catastrophically bad results) is much lower."
Erm - not quite with you again. If your chances of getting average results is lower then isn't that a bad thing ?
As regards catastrophically bad results, presumably from a big hit (?), then it's hard to compare the two. When you are in a trade, however long or short, this could happen to you. It could however be argued that longer term trades spend longer 'in the market' and are therefore more likely to suffer a big hit.

DaveGos
Quote "it seems to me that fewer trades could lead to increased risk because the population of trades is not large enough statistically to deliver the number of wins that systems win probability calls for."
Agreed. I was trying to use examples which could be classed as trading rather than buy-and-hold, so that there was enough opportunity to trade both.

Quote "if your arguing that more trades increases the chance of human error then thats another matter."
OK, so do you think that's true ?

Glenn
 

DaveGos

Active member
100 1
Quote "if your arguing that more trades increases the chance of human error then thats another matter."
OK, so do you think that's true ?

Glenn

Yes I do, some years ago I was involved in designing tests aimed at measuring a specific aspect of cognitive function. The test involved a simple repetetive task involving identifying specific instances of a coloured letter in a stream of rapidly changing coloured letters. We found that a statistically significant problem was that the longer the individual performed the task in one sitting the greater the increase in errors as the task progressed.
What they were doing was anticipating the target letter because they believed they were seeing sequences, when in fact the numbers were generated randomly.

This is why as traders if we are not aware of this tendancy to trade against our own strategy and ensure we have the self dicipline this requires we will fail.
It also helps to take a break every now and then, have a cup of tea, walk the dog, talk with your wife.

Dave
 

Glenn

Experienced member
1,040 118
Dave
Interesting. Certainly must have a bearing on the overtrading question.
Those traders here and elsewhere who trade very often must be able to keep their concentration well. Perhaps one or two of them will speak up and let us know how they do it ? They may have some personal methods to share, or just be lucky robots :)
My limit seems to be a couple of hours when day-trading. I have come to prefer to trade over longer periods (days), especially if the returns are the same. But then I'm not as young as I used to be.
Glenn
 

DaveGos

Active member
100 1
Glenn

I've never traded side by side with others but from my experience at work, I'm a project manager, the older you get the more risk aware you become. So heres hoping our trading improves with age.
Dave
 

Grey1

Senior member
2,186 178
Glen,

I am not going to bring the human parameter into this equation .. That depends on individual characters and disciplines ..

Your statement more trades means more risk is mathematically wrong..

This is the case I am putting forward

1) In the formula number of trades is not a variable.. hence irrelevant to talk about trade numbers

2) if you make 10 Trade or 10 million trade the expectancy formula only asks you for Average win/loss during the trading period. ..and not how many trade one made to get the average win

Quote " However does it not also apply because of the probability (math) argument ? "

Probability distribution needs a run of the trades over a large period.. I have said that before , if you throw a coin and get 4 heads probability would tell you the chance of this happening is 1/16.. based on such a small sample (only 4) one must not risk his capital. In fact it is point less to talk about probability of any thing over a short term period SO your argument based on probability of shorter sample is flawed.


I think I have explained and expanded enough on expectancy..

Conclusion for our younger traders :--

1) More trade does not make more risk .. it means more reward or more loss depending on your system expectancy.. Simple as that.

2) System with positive expectancy create more profit if traded more (in long term ) in short term any thing is possible.. Even casino's might lose in short term ..

3) Money management is the key to create wealth ONLY and ONLY in systems with POSITIVE EXPECTANCY .. NO ONE CAN MAKE £££ using MONEY MANAGEMNT Techniques if his trading system has negative expectancy.

The above conclusion is pure math and has been around for 100's of years and are not negotiable .. LAS VEGAS WAS BUILT BASED UPON THE ABOVE RULES..



Human error, emotions, physical, mental tiredness, dog jumping out of the window while trading and stuff like that does not interest me. All I am interested is if the foundation of my trading strategy is solid as a math then I can carry on to teach myself discipline to enforce the rules ..

I would expect our trader study their trading system and make sure , they have one with positive expectancy ..


PS:-- I have tried not to be distracted from the core of argument because I feel this is fundamental for your younger traders to understand..
 
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wysinawyg

Active member
186 1
Glenn,

<i>Using my earlier trade numbers:-
Longer term trade - Chances of a 100 point win from one trade is 60%
Short term trade - Chances of 100 points from 10 trades is (60%x60% .....x60%) = 0.36%</i>

Are you talking about just binary outcomes? In which case with the Longer trade your average is 60 points but the actual result will be 0 or 100. Now if that is your living (or even your pension fund) an outcome that stands a 40% chance of giving you 0 is risky, really risky. Over the course of 20 time periods you should average 60 points but you'll have lots of very bad time periods.

The short term trades on the other hand may only have 0.6% chance of getting 100% (I think that is right rather than your 0.36%, but its pretty irrelevant) but they only have a 0.01% chance of you ending up with nothing. So whilst you're unlikely to get 100 points you stand vastly less chance of coming out of the time period with 0 points and you should come fairly close to the average 60 points.

Now to me if I cared about how much I got I would much rather have a good chance of getting 60 in every time period and very little of getting nothing rather than what is nearly a toin coss between 100 and 0. The difference in volatility makes a huge difference in the real world, although the expectancy is the same one pretty much guarantees an income of some sort for each time period whereas the other pretty much guarantees no income a lot of the time (and both will give you the same on average).

On the maths argument I think you are just plain wrong and favouring a winner takes all gamble against an equivalent steady income, which seems much more risky to me even where the average is the same.

From a more human mechanics point though there is an element of truth to it. As I said you could argue that human error may well cost you a point a time which would be a big difference with 10x10 trades and much less with 1x100. On the other hand though if you miss the 1x100 through human error you get nothing at all whereas if you miss one of the 10x10s you've only dropped an average 6 points and will still probably come out with an income.

wysi
 

TheBramble

Legendary member
8,394 1,170
I'm probably missing something but...

If all your trades have the same probability of success it doesn't matter whether you run 1, 10, 100 or 100,000 trades. Your risk is exactly the same in each trade AND overall.

If you're saying "what's the probability of this trade failing OR this trade failing" that's 0.4 + 0.4 = 0.8.

If you're saying "what's the probability of this trade failing AND this trade failing" that's 0.4 X 0.4 = 0.16.

But on an individual trade-by-trade basis, it doesn't matter how many trades you run. If they all have the same probability of success (and your running a MM system that doesn't skew the data) you've got the same level of risk.
 

Glenn

Experienced member
1,040 118
Wysi
"Are you talking about just binary outcomes?"
No, it's not about a 'winner takes all' approach.
To refer to Grey1's formula, the expectancy related to the Average win.
So we are comparing how likely it is that the average win will be achieved from two systems with the same expectancy.
We could also compare them on the basis of how often they achieve a less (or more) than average win.
My thoughts on this are thay we would get the same result. Perhaps this needs futher debate.

The basic problem is how does one compare two systems which have the same expectancy but achieve the same outcome with different numbers of trades.
As we have discussed, there is the mathematical side and the 'human' side to look consider.

Grey1
I agree all your thoughts about positive expectancy for any one system.
But I don't think you have understood what I am saying.
I am trying to compare two systems which achieve the same outcome, each having the same expectancy, but one trading more than the other.

Tony
Agree what you say - for one system.
It's how to compare two that we are looking at.
Glenn
 

Grey1

Senior member
2,186 178
Glen ,

I do understand what you saying and I have addressed it before .. number of trades has already been included in average win/loss figure.. We dont care how we derived the average win/loss ...

I can trade 30 times and my average win to be $500 or 3 times to have an average win of.. $500. Does it really matter how the system gave me the average win NO ...

Been a good thread ..

Regards
 

TheBramble

Legendary member
8,394 1,170
Glenn said:
I am trying to compare two systems which achieve the same outcome, each having the same expectancy, but one trading more than the other.

If they have the same expectancy AND the same outcome AND each of the two systems use a trading system with the same probability of success - they can't have a different number of trades.
 
 
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