Random trading systems - "monkey with a pin"

[DionysusToast]

Come on your just here for the lulz now aren't you
Its been said plenty of times that random entry has to be coupled with a tightly
defined and quite likely complex exit strategy.

But why not cut to the chase and call that exit strategy predictive?

 

[Liquid validity]

Then why enter a limit at a specific price? Why not let it flow 3 ticks against you and enter there?

Your entering at limit argument only counts if the market moves your way from that point - otherwise my micro entry wins by a mile.

An entry short at limit 1668.50 is absolutely worse than my market order short 5 minutes later at 1670.

It is ONLY at the micro level that it makes a difference.

I never said enter a limit at a specific price.
I meant keep requoting if you are sitting on the ask.
Sitting on the bid/ask and requoting is one reason for all the HFT quote stuffing.
Yes its mainly about introducing processing lag, but the side effect is requoting
limit orders to earn the spread.

Earning the spread make a huge difference with intra day trading.
Especially so at the micro level:

http://www.turtletrader.com/why-no-short-term.html
Intraday trading is tough since the moves are not as big as for long-term trading and there is no comparable reduction in transaction cost. In general, short-term trading systems succumb to transaction costs and execution friction. You might simulate your system over historical data and notice how sensitive it is to assumptions about where you get your fills.

The shorter the term, the smaller the move. So profit potential decreases with trading frequency. Meanwhile, transaction costs stay the same. To compensate for profit roll-off, short-term traders have to be very good guessers. To improve guessing skills, you can practice dealing cards from a standard deck, one at a time. When you become very good at it you might be able to make money with short term trading.

I believe you've had this discussion with teh arab before

 

[Liquid validity]

Correct - and it takes a lot of skill and experience to know when to cut a trade.

A fixed set of rules about exiting trades applied in all conditions will just see you pay the spread.

It is only your predictive skills - about how far a move will go OR when a move is over that will see you end trades at a good location.

If using a fixed set of rules, it is only your predictive skills that will see you enabling the system when you predict that complimentary market conditions will prevail.

And if you have those predictive skills - you should put them to use at your entry point if trading outright positions.

If you are a discretionary trader, and more importantly a good discretionary trader
then I agree.
Put simply, I do not want to trade that way, its not about which is better.
Its purely about which is better for me.

 

[Liquid validity]

But why not cut to the chase and call that exit strategy predictive?

Simply because it isn't predictive.
Its reactive.

 

[DionysusToast]

Simply because it isn't predictive.
Its reactive.

sigh...

but only because you react to something predicting it will cause something else. Anyway - how do you react randomly?

I don't know why you are so hell bent on selling random trading to people. There's no shortage of patsies out there. There is no real need to create more.

What is the problem with admitting that you trade based on a favorable future outcome? That you need conditions to prevail after entry in order to make money? You accuse me of lullery but right now I think it's you that's having a larf.

The whole random trading argument is for lemmings.

 

[the hare]

You can lead a horse to water....

 

[DionysusToast]

You can lead a horse to water....

Really?

I know you say the above to make yourself appear smart but to who?

I could say I trade off cloud patterns or horoscopes (which would effectively be random). I could then say "you can lead a horse to tea leaves" to anyone that points out it's nonsense.

In that case, would the people that rep my posts be the sort of people you'd want to discuss sub atomic physics with?

 

[Liquid validity]

sigh...

but only because you react to something predicting it will cause something else.

I don't know why you are so hell bent on selling random trading to people. There's no shortage of patsies out there. There is no real need to create more.

What is the problem with admitting that you trade based on a favorable future outcome? That you need conditions to prevail after entry in order to make money? You accuse me of lullery but right now I think it's you that's having a larf.

The whole random trading argument is for lemmings.

Thats your view, and you are entitled to it.
There is plenty to suggest otherwise.
I don't believe its predictive, at least not on a trade by trade basis.
Its much more random for me at an individual trade level.
You on the other hand look to refine your entry as much as possible.
Speaking of a long term favorable future outcome, well yes I agree then,
or else I wouldn't do it.
I also accept the reality could be much different.

Its also arguable that having high costs and paying the spread in a game
where your adversaries do anything but is lemming like as well...
Lets face it, we'll never agree on this, but as ever its an interesting discussion nevertheless.

 

[new_trader]

You can lead a horse to water....

What? Surely you mean; you can lead a rat to morsels of food...

 

[kimo'sabby]

At least randomness can prevent large losses.

It is a "known fact" that 95% of all traders lose their money within the first year. This would be very difficult to achieve with random trading. Here's the profit distribution of 3000 traders that trade completely random for one year, one trade per day:

You can see that randomness very effectively saves the 95% from losing their money. Almost 50% are even making a profit in their first trading year with random trading, some even earn more than 7000 pips.

Haha, i just hope that over 99% of them have a day job. Besides what we can see on the graph, which is very limited, are you aware of any indepth statistics relating to the 3000 trading accounts?

 

[Splitlink]

Bottom line is this - no matter what you do in trading, you are making a bet on some future outcome.

OK - so you can defer that bet from a directional bias to a specific management technique. An oft quoted but seldom understood study on 'random' trading showed that a random entry with a trailing stop yielded a profit.

Before you go out and buy a new shiny coin to toss, the fact is that this study proved nothing about randomness. The study merely proved that in a trending market, you can make money with trailing stops. The trades were not relying on calling direction but relying in specific market conditions prevailing.

So - just like a spread trade or an arb trade, these trades were not directional BUT they were 100% reliant on a certain future market condition prevailing. Just like an Iron Condor in fact.

It's a bet, it is predictive, it is just not directional.

Don't think that random entry + money management is not a bet on a certain future outcome because it is EXACTLY that.

Whatever prediction you make - revert to mean, directional, volatility - it's still you making a call on what the market will do after placing the trade. You take risk that the market will do that and if you are right, the market pays you for taking that risk.

So - stop d!cking about with cr@p you don't understand and embrace the fact that you have to make a call.

I think that this debate about random trading is meant to be nothing more than a belief that one might as well trade in a random fashion as spend hours, IMO wasted hourse, involved in all kinds of research,

I have not decided, yet, what random method will suit me best. I0'll have to do a bit of research on that matter.

BTW, I was astonished to find that the last post I made, on this thread, was on page 5--and that was around 1730 this afternoon!

 

[Splitlink]

Trading does not have to be directional. That is just what most retail traders gravitate towards.

Trading is predictive.

Trading does not have to be directional but it is as well to know when the market is on a roll, as it is now, and go with it,

As far as prediction is concerned, most trading predictions are wrong and, I may, add, they are wrong after the most exhaustive amount of time spent on making them.

 

[Splitlink]

I disagree - if a chart is what helps you decide to hold a trade or not, then it must be a benefit.

I think I was commenting on random trading when I made that post.

With random trading I cannot see the point.

 

[Splitlink]

Sorry, so many pages to run through!

I can't read and answer any more--I'm knocking off!

 

[kimo'sabby]

A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn't strive for perfection. It didn't search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.

The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors. The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat.


By your own admission, most traders will do worse than random. Given that's the case you have to ask why they wouldn't go for a higher probability method of randomly tossing a coin. I think the rumpled ones story goes some way to answering that question, or at least providing an awareness of how humans are programmed to behave.

1. Who conducted this experiment? 2. More importantly, what was explained to the undergraduates, before the experiment took place?

Number 2, is very important.

The comparative as i see it at the moment is this: Hungry Rat vs Some People Ordered To Guess.

T!ts on a fish, comes to mind.

 

[kimo'sabby]

A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn't strive for perfection. It didn't search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.

The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors. The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat.


By your own admission, most traders will do worse than random. Given that's the case you have to ask why they wouldn't go for a higher probability method of randomly tossing a coin. I think the rumpled ones story goes some way to answering that question, or at least providing an awareness of how humans are programmed to behave.

Let's reverse the bias. The rat sought out liquidity. Whereas the undergraduates fooled around with a random approach, and unfortunately for them, lost their wonderfully embroidered t-shirts.

 

[the hare]

Really?

I know you say the above to make yourself appear smart but to who?

I could say I trade off cloud patterns or horoscopes (which would effectively be random). I could then say "you can lead a horse to tea leaves" to anyone that points out it's nonsense.

In that case, would the people that rep my posts be the sort of people you'd want to discuss sub atomic physics with?

I used to argue with mr Socco that there is more than one way of skinning a cat. It makes no difference to me if people see the benefits of random entry or not, I just point out enough info to maybe persuade people that it's an approach with merit.

I would have no problem trading off horoscopes or even cloud patterns (a few of the random generators out there are based on atmospheric noise). It's as nonsensical as technical analysis or price action, and serves the same purpose in most cases.

Some people might believe that your success was a function of your ability to analyse cloud patterns others may be more enlightened. 20 years ago I probably believed successful traders using TA where successful due to their knowledge of TA but now I know better.

Markets are not simple mechanical mechanisms that can be encapsulated into simple if a then b type rules, and attempting to do so, is pointless, but of course its relatively easy to do so, hence the popularity of TA based systems

I think there's merit in TA, and I know people who appear to trade it successfully, but I equally well think they could trade the inverse of their TA signals, because trading really has jack to do with trade entries.

 

[kimo'sabby]

Markets are not simple mechanical mechanisms that can be encapsulated into simple if a then b type rules, and attempting to do so, is pointless.

The same could be said for a variety of pursuits, but to approach them in a random fashion would boarder on insanity.

 

[ryandj2222]

The same could be said for a variety of pursuits, but to approach them in a random fashion would boarder on insanity.

Which pursuits and why? (not being awkward, just want to understand the reasoning).

 

[kimo'sabby]

Which pursuits and why? (not being awkward, just want to understand the reasoning).

Hahaha! Durrrr! Tennis??