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Most systems are not very good (technical and fundamental), that is why 20%
of the poeple make 80% of the money, My belief is that you need to trade
with tools not widely used. You need to research the market you trade very
thouroughly if you want to devise a superior system for it. I trade a
statistical approach on one market and I know for a fact that very few
poeple use a system that even remotely resembles mine, once they find out
about it, it will cease to work as that info will be priced into the market
rendering my approach obselete. This is why most technical systems/
indicators do not work as well as they have done in the past, everyone
watches them or trades them thus the technical info is already priced into
the market. Anyway this is an interesting theory I have come up with.
Examples: Mondayitis in the S&P500. Also the SPI is AUSSIE has not exhibited
day of the week behaviour that it has exhibitied in the past for the last 2
years, in fact it has exhibited almost exactly the opposite behaviour. some
Markets are now more volatile than rpeviously rendering averages, trend
following tools useless unless used in different ways to the norm. I reckon
you need an original approach that is thoroughly tested and tradeable in
real time and is easy to implement.
Just a theory, however it could be sound. As for finding a system that beats
the market and keeping it too yourself, well there are many many profitable
and robust systems out there, especially if you are not a greedy trader and
are willing to wait for a stacked deck trade.
As for all systems reverting to the mean (I do not think so, human nature,
information assymetry and difference of opinion mean markets will never be
fully efficient, thus enabling smart traders to profit)
----- Original Message -----
From: 'Lucky Bastard' <ronin@xxxxxxxxxxx>
To: Sean O'Toole <sean@xxxxxxxxxxxxxxxxxxxx>; Omega List
<omega-list@xxxxxxxxxx>
Sent: Tuesday, January 30, 2001 9:05 AM
Subject: Re: REALITY CHECK
> : With regard to reversion to the mean, I'd suggest a hour or two with
*Time
> : Diversification Revisited* Reichenstein and Dorsett, Baylor University
and
> : Research Foundation of the Institute of Chartered Financial Analysts,
> 1995.
>
> What? Read a book written by academics for the Society of Random Walkers?
On
> a list devoted to technical analysis, that's heresy!! :-)
>
> What I meant by the following:
>
> > If you believe that everything reverts to the mean, then you're using
the
> > wrong math to trade. If you believe that the markets conform to a
> > binomial/Gaussian distribution, you need a reality check.
>
> is that a lot of 'orthodox' market theories (random walk, modern portfolio
> theory, etc.) are based on the assumption that the markets conforms to the
> normal distribution. But that is based on the assumption that the data is
> continuous. The fact that we have gap openings should clearly show that
the
> markets are not continuous and they do not conform to the normal
> distribution but rather to the Paretian distribution (fatter tail ends.).
> What may seems to be an event reverting to the mean is actually 'normal'
> market actions. :-)
>
> : With regard to normal distribution, its the break outside the
distribution
> : that produces the greatest opportunities for the trader. In the past
ten
> : years we have had four or five events that come to mind wherein markets
> : moved out four standard deviations or more (on a monthly basis) from the
> : mean and all four occurrences provided tremendous opportunity as they
> : reverted. Once in lumber, once or twice in coffee, once in wheat and
once
> : in the nasdaq (closer to 6 SDs). So, if there have been only four or
five
> : such occurrences in the past ten years, why do I need any sort of
reality
> : check?
>
> What may seem to be 6 sigma events with in a Gaussian distribution in
> reality is a insignificant 2 sigma event with a Paretian distribution. And
> for a guy like me whose longest trade might last 12 hours over a 2-3 day
> period......these events are irrelevant.:-)
>
> : > : The system trader's primary job is finding the
> : > : next system. The system trader's greatest fear is that his system
is
> in
> : > the process of disintegration.
> : >
> : > Again, prove it. If you're gonna keep on making these generalizations,
> I'm
> : > gonna keep on asking for proof. :-)
> :
> : One of last year's most effective system trader was likely Roy
> Niederhoffer.
> : He's made a business of following eleven or twelve systems and picking
> which
> : are likely to be working at any given moment. I think Mr. Niederhoffer
> : would concur that he and his firm's ability to pick the right systems at
> the
> : right time has contributed to their success.
>
> But that doesn't prove your statement that 'The system trader's primary
job
> is finding the next system. The system trader's greatest fear is that his
> system is in
> the process of disintegration.' I'm a systematic trader and I'm not
looking
> for the next system. And my greatest fear is not my system's
disintegration.
> My greatest fear is missing a signal because I was in the head sitting on
> the throne. :-)
>
> : I agree with you that the system that fails is fundamentally flawed but
I
> am
> : of the opinion that declaring a system fundamentally sound is as
difficult
> : as proving that global warming is something other than an aberration.
The
> : majority of the systems in use today have not been around long enough to
> : impress beyond simple randomness.
>
> But if you've test it right (backwards, forward, rolling forward,
> etc.)......
>
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