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