Random Entry & Perception

[bevok]

Interesting that the random entry still works with the massive stop, an indication of increased noise over time relative to trend. The point is that a vastly improved edge is possible with a good entry technique, in terms of risk adjusted returns. Van Tharp does tend to hammer on about exits a bit too much (granted a lot of people even today ignore them, witness a lot of trading books and systems) and in reality a great entry with an ordinary exit (e.g. fixed time based exit) can also make money. The main thing is to get out when its going wrong and recognise they're both significant.

 

[Hilarymannah]

Reading the comments posted here,.I would suggest to any "newbie",...follow BSD's advice more so !
Don't let anyone confuse the issue of making profits from the markets,...
As BSD points out,.."smoke and mirrors", are major obsticles in our society, towards knowing how things "really" work!
Most "authorized" books out there, are total crap,..and only look good in ones library, in order to impress the naive and gullible.
It really isn't as complicated as most folk make out! ; )

 

[Hilarymannah]

BTW: When you learn "exactly" where to enter,...a 10 pip stop is ample!

 

[Shakone]

Mr Gecko, I'm not sure what your statement is trying to say. Are you suggesting that exit criteria don't make any difference at all? That seems absurd. And further than that, if you don't believe an exit has any effect on giving you an edge, then similarly neither should an entry.

Results are random yes. That doesn't prevent there being an edge. The results for a casino are random, but you'd agree the casino has an edge.

So again, with random entry, and some exit criteria, why can't you have an edge? I believe you can. I believe if you have good entries, you can have an even better edge. Money management just keeps you in the game so your edge can play out.

 

[BSD]

It really isn't as complicated as most folk make out! ; )

Couldn't agree more mate !

Thing with the smoke and mirrors gang is pure ego amd trying to appear clever by obfuscating a perfectly simple issue beyond all belief, by trying to imply that there is some secret holy grail behind net profitable trading which only they are privy to but won't ever divulge when clearly nothing of the sort exists.

One really doesn't need to look much further than at the pretty big number of trend following CTA's who made billions with some of the simplest methods around to grasp that getting rich needn't involve rocket science.

Billionaire trend followers Larry Hite and John Henry to show just two:

http://en.wikipedia.org/wiki/Larry_Hite
http://www.businessweek.com/magazine/content/05_02/b3915618.htm

And another trend follower attributing his great success to technical analysis and indicators:

"Superfund's origin dates back to 1991, when Christian Halper and Christian Baha developed a software system for the technical analysis of financial data. Within two years, this program became the leading provider of market delivery software in Austria. This success led to the development of the Quadriga Investment Group, created by Christian Baha in 1995. Today, the group has more than 280 employees worldwide. The quadriga Group launched its first alternative investment product for private investors on March 8, 1996 called the Quadriga Beteiligungs - und Vermogens AG". In 2003 the Quadriga funds were globally unified under the umbrella brand name SUPERFUND. Today, the group has more than 1.5 billion dollars under management from more than 55,000 retail and institutional investors."
http://www.superfund.com/
Technical analysis:
Trading without emotions
Sound managed futures funds like Superfund funds are based on proprietary, fully automated technical trading systems. These eliminate poor investment decisions which are often the result of human emotions. A vast range of technical indicators and historical prices are analyzed by the computerized trading systems to automatically generate buy and sell signals.
http://www.superfund.com/HP07/Superfund_Trading System.aspx

 

[MrGecko]

The Edge you refer to is an inherent property of the population data (for example, the inclusion of 0 and 00 on a roulette wheel), not a result of the sampling strategy.

 

[MrGecko]

BSD, stop multi-quoting the same examples again and again and again. Read these and have a long hard think to yourself.

Survivorship Bias
Confirmation Bias

Until then you're on ignore.

 

[Hilarymannah]

BSD, I think it's called "professional esoterica",....
I remember a guy telling me once,..he said "If you ever come across something that is more complicated than it need be,..you know you're being conned!",. Quite sound advice IMO,..; )

 

[BSD]

Mr Gecko I think it'd be better for sharp guys like yourself to to try and find another Wasp to invest with than keep criticising the clearly undisputable findings of some Market Wizards who got rich from trading and probably understand the backtests they did.

Anyway, here is a 4TH ! proven backtest that out of the kindness of my heart I am providing to back up my stance that random works lol:

"Goodness, I've read that piece a year ago and had forgotten it. But I've just managed to verify it.

Random entry can be profitable, i.e. exits are at least if not MORE important than entry. Position size and exits are thus significantly more important than entry alone, but 95 pct of advice is dedicated to the entry, that's fairly amazing when you think about it."

Meaning, umm, he verified that in his own backtests, and, umm, again came up with the same verdict as Tom Basso.

At least SOME people here don't post nothing but hot air and unproven allegations, but like our good Market Wizards et al back up their stuff with, umm, backtests.

 

[Shakone]

Correct MeGecko. But although the result of a trade is random, that randomness is not SOLELY determined by the entry. The result of any trade is a function of entry, exit and randomness. Agreed?

 

[BSD]

BSD, I think it's called "professional esoterica",....
I remember a guy telling me once,..he said "If you ever come across something that is more complicated than it need be,..you know you're being conned!",. Quite sound advice IMO,..; )

Lol yeah what we're witnessing live eh

QED and all.

 

[bevok]

I thought the edge was a property of the fact that market prices aren't a normally distributed data set deriving from perfect efficiency? Instead they're far more skewed with a higher tendancy to mean reversion, and 'fat tails' in the name of large price movements (trends) which occur far more often than expected.

Simple mechanical systems can work because they can exploit these inefficiencies.

 

[BSD]

Simple mechanical systems can work because they can exploit these inefficiencies.

Absolutely !

Commerzbank have a fund that has all of one parameter for entering and exiting trades...

The trusted MACD indicator.

And the fund is profitable.

"Deshalb hat die Capital-Redaktion
einmal nachgerechnet und verschiedene Timing-Strategien
über einen Zeitraum von 13 Jahren gegen den DAX ins Ren-
nen geschickt.Am besten schnitt dabei dieMACD-Strategie
ab.Wer die Signale dieses Indikators konsequent umsetzte,
konnte in den vergangenen 13 Jahren mehr als das Sechs-
fache*aus seinem Geld machen."

http://www.comdirect.de/pbl/static/pdf/corp0075.pdf

Grew your money six-fold over the last 13 years which ain't bad for a public fund.

 

[timsk]

Tim to me DT and Socrates and The Expert are all of the same flesh, substance free posers who are entirely clueless and come up with seriously misleading crap like TA not working - heck I keep posting evidence to the contrary and Toast is just in total denial - or "pros" not using charts etc as per my post above yours:

Hi Markus,
To accuse DT of being substance free is unfair and untrue in the extreme. To suggest he's clueless really does you no favours at all, as even the greenest of newbies will conclude quite quickly from his posts that he's a very smart cookie and extremely knowledgable about the markets. As for so called 'evidence', well, it's pretty subjective much of the time. I think this is the point that DT is making (well, one of them at any rate). If you want to accept verbatim what you read in Market Wizards and elsewhere - that's your prerogative. However, there's absolutely nothing wrong in others questioning Van Tharp and other gurus and, even, having the temerity to suggest that what they say may not be quite as watertight as they'd have most of us believe.

I recommend you try and read some of DTs posts with an open mind. The emphasis is with good reason and I have a confession to make on this front. When DT first appeared, I took exception to some of his early posts and concluded rather too swiftly that he was/is a bit of a tw@t. Then I found out he was someone I not only knew, but had been in contact with (off forum) for quite a while and got on with very well. Additionally, he (DT) had been (and remains) extremely generous with his time, helping me with my trading in ways too numerous to mention. I was duly embarrassed and re-read DTs posts in the light of knowing who he was and my perception of his online persona then changed. Don't be fooled by it. Yes, he can be challenging at times - but that's his whole raison d'etre. If my opinion holds any sway with you at all, then I urge you to reconsider DT, as I can assure you that most of your conclusions about him are seriously wide of the mark.

Tim.

 

[meanreversion]

Anyway, here is a 4TH ! proven backtest that out of the kindness of my heart I am providing to back up my stance that random works lol:

"Goodness, I've read that piece a year ago and had forgotten it. But I've just managed to verify it.

Random entry can be profitable, i.e. exits are at least if not MORE important than entry. Position size and exits are thus significantly more important than entry alone, but 95 pct of advice is dedicated to the entry, that's fairly amazing when you think about it."

Meaning, umm, he verified that in his own backtests, and, umm, again came up with the same verdict as Tom Basso.

At least SOME people here don't post nothing but hot air and unproven allegations, but like our good Market Wizards et al back up their stuff with, umm, backtests.

Ok now I know I've made it, I've been quoted on t2w. Happy days!

I just brought up my "random" system and it's still producing some nice results. But there are some things I need to make clear

1. The level of randomness is limited, as it applies only to the entry. Adding a trend filter significantly increases profitability, BUT of course makes the system less "random".

2. The objective of coding up this type of system (trend following but with coin flip entry) is really to explore the value of position sizing and exits. I've read through the posts on this thread and there is discussion about what constitues "random" and other (quite deep) mathematical discussions. I am not particularly interested in that.

For me, it's more this ----- position sizing and exits are incredibly important, BUT are the least talked about. My "random" model enters on a coin flip, but then scales (pyramids) in in a specific fashion, and exits in a specific fashion. Most threads about trading are on where to buy (e.g. "buy BP here?") but position sizing and exits are rarely discussed.. why is that?

If 90 pct+ of retail traders fail (surely the numbers should be 50:50 or 40:60 if you allow for commission, bid/ask etc., but certainly not 10:90 or 5:95) is there a reason for this? Is it because of general lack of awareness of position sizing (which also incorporates an element of money management) and exits?

 

[redart]

I've always found DT's posts very thought provoking, I dont think he 'speaks in riddles' either. If anything, he's often the one unraveling the cryptic ways some people choose to express themselves, and then translates it into something idiots like me can understand, lol!

He also sent me some trading material/ebooks a while ago

I wouldn't tar him with the same brush as 'the_expert"...that's insulting

 

[DionysusToast]

There is a reason that random strategies don't make money - it's simply because they can't. When I say they can't - I mean it is against the laws of mathematics and in a way physics.

I shall explain.

There is, you will mostly all agree, a finite amount of money in the markets.
That amount is the amount of money that all players have put in over time, less the operating costs of the markets and less what they have taken out.

It is not possible for all players to take more money out of the markets than they put in. Just as it's not possible to take more water out of a bucket than is in the bucket. To take money out it needs to come from other people and your ability to extract money from the market whilst others lose it is an 'edge'.

Let's say we had a random strategy that made money. Then lets say that every investor used that same strategy. It is physically impossible for all players to take more money out as a whole than they all put in, therefore something would have to give.

If everyone implemented this 'random' money-making strategy, the markets would equalize and change in such a way that the strategy would no longer work. The edge would disappear.

If we can accept that the markets can change in such a way that a strategy stops working then we must acknowledge that the strategy itself is exploiting something within the markets at that time. The edge itself is tied to some expectation of behaviour in the market, in this case, a specific volatility profile. When that behaviour is not present - they system will not make money.

In the Van Tharp book, no-one claims to have executed this strategy as a coin toss. They discuss only testing it. The people running the tests thought they were executing a test in randomness when in reality they created a volatility specific strategy. It is understandable that they didn't see this, although a couple of the other things they mention border on cheating.

In particular, they got 80% results and added something that took the results to 100% across the same data set. This is curve fitting. One can only wonder how many things they attempted in their efforts to get from 80% to 100% for that data set. I am sure people here have done similar things - I know I have.

Note also - they didn't discuss the size of the 80% of winning runs to the 20% of losing runs, nor did they discuss overall effect of adding the rule that bumped the ratio to 100%. I presume they must have run out of ink at that point.

 

[DionysusToast]

He also sent me some trading material/ebooks a while ago

errrr.... but nothing copyrighted, eh ????

 

[DionysusToast]

When DT first appeared, I took exception to some of his early posts and concluded rather too swiftly that he was/is a bit of a tw@t.
Tim.

err... thanks Tim

 

[redart]

errrr.... but nothing copyrighted, eh ????

Of course not!! That would be unethical...