Re: [EquisMetaStock Group] Trading ain't gambling, is it?, MetaStock Email Archive

What I said is as relevant to stocks as it is to anything that is not just pure speculation.

I’d like to recommend a book if you haven’t read it already:

J.M. Hurst “The Profit of Stock Transaction Timing”

It’s a classic from 1970…but what he says about cycles, fundamental trends and randomness has just as much relevance today. If you read that and then look at a modern stock chart in light of what he says then I would suggest that it becomes very difficult to argue that there is not a significant cyclical component present in most markets. Hell, it’s obvious anyway, you don’t need to read the book! And once you admit that then it becomes natural to conclude that those cycles can be modelled – not perfectly of course, but perhaps at least to a degree that it can benefit your trading.

A very dirty summary, but with a nice picture representation of what a whole bunch of superimposed cycles actually looks like, can be seen at http://www.stockmarketcycles.com/technica.htm

That’s not all there is to it of course…but if cycles do exist then it can’t be all randomness from “fear and greed driven by emotion” can it?

Andy

From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx] On Behalf Of rdb104
Sent: Tuesday, September 06, 2005 7:31 PM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: Re: [EquisMetaStock Group] Trading ain't gambling, is it?

I'm stocks so a lot of what you say isn't applicable.

----- Original Message -----

From: teclogeo

To: equismetastock@xxxxxxxxxxxxxxx

Sent: Tuesday, September 06, 2005 9:54 AM

Subject: RE: [EquisMetaStock Group] Trading ain't gambling, is it?

Well I don’t “agree totally”. Far from it.

Ų I don't know why anyone thinks that fear and greed driven by emotion can fit neatly into some mathematical formula(s)

Believe it or not, there are other influences on what moves the markets. Try telling any experienced commodity trader that supply & demand and seasonality have nothing to do with prices. I’m sure that if you put you mind to it that you could think of a few more influences that were not purely emotional.

Also, believe it or not, there are ways to fit models to market price behaviour that can help you, as a trader, put the “odds” in your favour. They may not be completely accurate as there is undoubtedly some random noise element in the markets also, but that does not mean that these “mathematical formulae” (for that is essentially all they are) are completely worthless. Just because you can’t think of them, doesn’t mean they don’t exist.

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 -----

From: superfragalist

To: equismetastock@xxxxxxxxxxxxxxx

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