MG, did you
know that Super had a sense-of-humour bypass a few months back? It was about
the same time that he ran out of useful things to say and so fell back on his “I’ve
tested everything and read every book, so listen to me” routine. Oh that
and that we should all get our grandmothers to subscribe to Roy’s newsletter (or something like
that).
Sorry Super, I
don’t wish to get too personal here, but the plain fact is that you are
misleading people with statistics and semantics. And you seem lately, through
no fault of your own I’m sure, to have the acquired the aspect of some
emminent being who must not go unchallenged. Sorry…I’ve always been
a heretic by nature, so I’ll challenge the almighty Word of the
Super-being!!
Trading =
gambling. Yeah, really? For a start, I think that you mean Speculating = Gambling
(if we’re going to be pedantic, then let’s do it properly). But to
get to the concept, are you really saying that buying a share is similar to
throwing a dice and betting that a six will come up?
It seems to me
that you are confusing “risk” with “hope”. *Pure* gambling (I’ll deal with the
pros in a minute) is all about making a bet and “hoping” that you
win. If a trader did nothing more than stick a pin in the Wall Street Journal
financial pages and bought that stock then he/she would be gambling in the same
way. But I think most of us are beyond that level. We have tools at our
disposal to put the odds in our favour. A *pure*
gambler has to cheat to get the same advantage – he has to get the dealer
to throw weighted dice, or he has to card-count. Sure he/she can employ good money
management to try to get the probabilities in his favour over the long run –
but this is a method that we also get to use. And yes, there is another
parallel too…the gambler can “study form” if, for example, he
is betting on the horses. But that’s the same as studying market fundamentals
isn’t it?
So,
all-in-all, technical analysis means that trading *can be* and *should be*
much better than simply doing what the horse tipsters do, no matter how good
their form book is. When we use charts properly we give ourselves the
opportunity to change our bets in the middle of the race, depending on how it’s
panning out. We can cut our losses if the horse starts off facing the wrong
way. A gambler is stuck with his $1000 bet at 125-1 after the starting gun goes
off. We can sell out and maybe get $900 back.
It’s a
bad analogy. And it misleads people into thinking that they have little chance.
Trading is
also not the same as poker as you suggest. A professional poker player achieves
his greatness not through the cards he is dealt, but by the way he copes with
the situation and out-psyches his opponents. If a trader, good/bad/indifferent,
tried to ‘bluff’ the market then the market would not give a damn.
In poker there are six or so players. The market is a little bigger than that.
I would
suggest that, if you’re going to draw a parallel then it should be that:
Trading = Business. Approach trading like you would approach running any other
successful business and you stand a chance. Gambling is for mugs, there is only
a minimal chance of controlling the outcome – most success lies in pure
luck and the rest in deception of the house or your opponent. Trading is a
business: we *have control over our market
risk*
Also, I’ve
read this “95% of traders fail” line a few times now like it’s
some kind of unique thing to trading. OK, you didn’t mention it in your
last post…but you certainly have before and now people are quoting you to
boot. The plain fact is that if you look at ANY business at all over a decent
period of time then most of them fail ! A very hefty percentage of them (I don’t
know what that number might be, but it should be pretty high) fail in the first
year, but if you look at the Dow Jones now compared to the same index 20 years
ago then how many of those old companies are still there? Even the successful
business eventually go under it seems!! Why? Is it something to do with the
fact that they are run by human beings and that those businessmen don’t
adapt very well to changing market conditions? Sound familiar?? Is there
perhaps some commonality between why human beings as businessmen fail to adapt and
why human beings as traders fail in the same way. And why people like gambling
so much??
The “drop
out rate” in poker is about the same as that for trading because the “drop
out rate” in just about every money-making fad is the same. It’s
the psychological make-up of the people that take part that is the common link,
not the games/businesses (call them what you like) themselves. There are just
as many bad businessmen out there as there are bad gamblers, as there are bad
traders.
Ø
Basically I make highly
educated, well thought out, good probability
guesses.
Well I’m ‘guessing’
that Bill Gates probably did the same when he set up Microsoft. Good for you. But
that is *not* the same as what a
successful poker player does.
So that means
that the rest of us might as well all give up and work for Walmart, eh? We’re
doomed…DOOMED I say!!!
Oh, come on…it’s
not that bad. Just remember that success lies within…keep an open mind
and never fail to adapt.
And that 89.346%
of all statistics are made up on the spot.
From:
equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx] On Behalf Of rdb104
Sent: Tuesday, September 06, 2005
10:12 AM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: Re: [EquisMetaStock Group]
Trading ain't gambling, is it?
I haven't done your Freeburg research but from experience I
agree totally.
There is always uncertainty..and most of these guys think
you can 'find' the grail when dealing
with randomness most of the time. I don't know why anyone
thinks that fear and greed driven by emotion
can fit neatly into some mathematical formula(s).
----- Original Message -----
Sent: Monday, September
05, 2005 8:58 PM
Subject: [EquisMetaStock
Group] Trading ain't gambling, is it?
Well, I guess we have somewhat different opinions MG.
I've got a pile of research that I'm going through
right now from
Nelson Freeburg. I think he would disagree with
some of your points.
He's done many thousands of tests over the last 13
years. He has
trading systems that have traded only 9 or 10
times over 20 years but
have beaten buy and hold by a few percentage
points. Some of those
systems have winning trade percentages as high as
80%. There's nothing
academic about them.
A system making only 9 trades in 20 years says
nothing about how long
a trade lasts. It says nothing about the cost of
margin, or the amount
of money someone can make. Some of Freeburg's
systems have benefited
from margin and some haven't.
He also has several systems that have been
backtested for periods of
20 to 50 years. During that time, they showed
consistent performance
but in the late 90's the systems started to drop
off sharply in
performance, and some failed completely.
I'm not going to speculate on whether gambling is
a sin, but many
types of gambling such as poker have the elements
of luck, skill and
probabilities as their components. In the hands of
a truly skilled
player, which there are very few, the odds are on
the side of the
player. Based on my perspective, and not yours,
trading is exactly the
same thing. You have to be lucky, skilled and have
probabilities on
your side.
If you look at the top poker players over the last
20 years, none of
them made money consistently every year, but over
the 20 years they
did very well. They also had some losing years and
some big winning
years.
Trading got popular when it was advertised and
talked about all over
television. Poker is now popular for the same
reasons. Every
once-in-a-while someone without truly good skills
can get lucky and
win big. That's why a lot of people take up
trading who don't have a
clue as to what it takes to be consistently good
at it, and it's the
same reason people start playing internet poker
and then throw down
$10,000 to play in a tournament. It's takes about $500,000
in front
money to play most of the world poker tour. How
many players make more
than it cost them to play? How many traders make
more than it costs
them to play? The drop out rate is about the same.
I use some of the same systems that Freeburg has
been working with as
part of my market conditions barometer, which
improves my winning
percentages as I've written about before. I'm
hoping that some of the
improvements I've come up with to these systems
will increase the
returns that Freeburg has shown over long periods
of time. I don't
know yet. The couple that I have worked on so far
have had very good
test results.
In my trading I stay keenly aware that on any day,
I may not win. I've
educated myself to as high a level as possible
regarding the game I
play. I've tested and retested everything I do so
I know the
probabilities. I've practiced and practiced and
practiced many
thousands of times before stepping up to table to
play with real
money. Now I've played it live for several years,
and I know pretty
well what I can expect to earn. However, I also
know that when I'm
lucky, I make more money than when I'm not. I know
the market is
unpredictable and may not deal me the cards I
need, even when the
probabilities are 99 to 1.
Basically I make highly educated, well thought
out, good probability
guesses. Well, now I'm guessing that if that's not
gambling, it's
really really close.
--- In equismetastock@xxxxxxxxxxxxxxx, mgf_za_1999
<no_reply@xxxx> wrote:
> If your system trades 9 times in 20 years,
either give the money to
> some index manager, or put it in the
bank. You are not trading, you
> are buying and holding or investing. If
you add any conceivable
> gearing then either you will run out of
margin, or pay through your
> ears in carry over the 20 years with just 9
trades.
>
> Anyhow, 9 trades in 20 years sounds academic
to me - 30 trades plus
> degrees of freedom sounds practical to me.
>
> I do use such long term, 9-trades-in-20-years
systems to extract the
> long term trend from a ticker. But I do
not use that as a trading
> decision - just as part of the input.
>
> Yes I agree with you, trading is not
investing. But I certainly don't
> think trading is gambling. It is
gambling if you don't know what you
> are doing, probably with much worse odds than
you'd get in a gambling
> house. Trading is buying and selling of
financial instruments with a
> view to making a speculative profit while
gambling is statistical and,
> given the odds, a sin!
>
> Regards
> MG Ferreira
> TsaTsa EOD Programmer and trading model
builder
> http://www.ferra4models.com
> http://fun.ferra4models.com
>
> --- In equismetastock@xxxxxxxxxxxxxxx,
superfragalist <no_reply@xxxx>
> wrote:
> > Your premise is from a purely
mathematical view, specifically
> > statistical. However, the market doesn't
always supply data in a
> > complete packages ready for statistical
testing and inference.
> >
> > Suppose we have a market timing system
that has made only 9 trades in
> > the last 20 years and all of the trades
have been highly profitable.
> > Do we use the system or not? There are
not enough trades to validate
> > the results.
> >
> > We can wait another 40 years or so and
we'll probably have enough data
> > and enough trades to make statistically
meaningful inferences.
> >
> > None of this is neat, precise or
absolute. And there are no hard and
> > fast rules for how many trades a system
needs to give good test
> > results. There are approaches which are
better than others like this
> > one by MG, but there is no one correct
answer to the question.
> >
> > After many millions of systems tests and
a lot of trading years in the
> > markets, no one has come with a trading
system, a timing system or any
> > other system that works consistently
over long periods of market
> history.
> >
> > Trading is not investing, it's gambling
with an edge to the player if
> > the player is an expert at that game.
However, the house is always
> > changing a little something here or
there that changes the
> > probabilities of events just enough to
change the game. It's the
> > players job to stay up with these
changes and adapt well enough to
> > keep the edge on the house.
> >
> > Newbie's just don't get how long it
takes and how hard it is to get
> > the edge consistently and over long
periods of time. A newbie thinks
> > if they make money one year, they're
going to be a successful trader
> > every year. Call me in twenty years with
your track record and if it
> > measures up, I'll send you your
certificate of validation.
> >
> >
> >
> >
> >
> >
> >
> >
> > --- In equismetastock@xxxxxxxxxxxxxxx,
mgf_za_1999 <no_reply@xxxx>
> wrote:
> > > The 30 trades is based on the
central limit theorem - after about 30
> > > observations things settle down if
the mean of random samples
follows
> > > a normal distribution. There
are several assumptions in this
> > > approach, but it should give a good
idea. I'd push it up a bit, say
> > > to 35 or 40. Also, you need
to adjust for degrees of freedom if you
> > > do any optimisation. Suppose
your system is driven by 1 parameter,
> > > then you must add this to the
30. Suppose you have a big system
that
> > > uses say 10 parametrs - then you
need at least 40 trades.
Especially
> > > if the system gets bigger, it needs
more trades to give any
> > > confidence, and I will feel better
if such a system produced good
> > > results in 50 or more trades.
> > >
> > > Another, excellent way to test is
to use a hold out sample.
Build the
> > > system on a portion of the data,
say an 80% sample. Then test it on
> > > the rest and you can see if you
have a winner or fools gold. The
> > > *proper* way to do this is to
segment the sample in say 10
blocks (of
> > > 10% of the data each). Now
you choose randomly any 8 blocks,
optimise
> > > the parameters of the system on it,
and test it on the remaining 2.
> > > Then you choose another 8 blocks
randomly, optimise the system, test
> > > it on the remaining 2 and so
on. After you've done this say 100
> > > times, you test the results.
> > >
> > > For this you need special software
- one good example can be
found at
> > >
> > > http://weka.sf.net
> > >
> > > In practise, just chop off the most
recent 20% and you'd get a good
> > > idea if the system will work or
not.
> > >
> > > Regards
> > > MG Ferreira
> > > TsaTsa EOD Programmer and trading
model builder
> > > http://www.ferra4models.com
> > > http://fun.ferra4models.com
> > >
> > >
> > > --- In
equismetastock@xxxxxxxxxxxxxxx, "rvalue1" <rvalue1@xxxx>
wrote:
> > > > I would contend that if you
generated >30 trades in the up
> direction
> > > > for a sufficiently long period
2 years or so, you would have
> > > > confidence that the system
does well in the up direction. Same
for
> > > > down and catch the sideways as
it transitions. Very unusual to
> find
> > > > a great system up, down and
sideways!! If you have one, let me
> know.
> > > >
> > > > If you are waiting for 1000
trades, you must trade very often.
> > > >
> > > > --- In
equismetastock@xxxxxxxxxxxxxxx, "Ed Hoopes"
> > > > <reefbreak_sd@xxxx>
wrote:
> > > > > I recently attended a
lecture by Keith Fitchen, the author of
> > > > several
> > > > > successful trading
systems most notably Aberration. He says
that
> > > > > statistics on more than
1000 trades must be compiled before the
> > > > > results can be considered
valid.
> > > > >
> > > > > Ed Hoopes
> > > > >
> > > > > --- In
equismetastock@xxxxxxxxxxxxxxx, chichungchoi
> <no_reply@xxxx>
> > > > wrote:
> > > > > > Does anyone know how
many trades the evaluation needs to be
> sound
> > > > > > statistically?
> > > > > > Thank you in advance
> > > > > > Eric
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