(Mathematician needed) Continuous vs. discrete returns? - Psychology and Money Management | futures io social day trading
futures io futures trading


(Mathematician needed) Continuous vs. discrete returns?
Updated: Views / Replies:628 / 8
Created: by youngbloodtrader Attachments:0

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors – all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you don’t need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 
Thread Tools Search this Thread
 

(Mathematician needed) Continuous vs. discrete returns?

  #1 (permalink)
Trading Apprentice
Helsinki, Finland
 
Futures Experience: Intermediate
Platform: WH Prostation
Favorite Futures: Index-derivativas
 
Posts: 1 since Nov 2014
Thanks: 0 given, 0 received

(Mathematician needed) Continuous vs. discrete returns?

Hi!

I am entering the returns of my trades into an excel sheet, to calculate statistical data. I calculate the returns in percentages (closing price/ opening price)-1 and came across a problem: Do i need to calculate the returns as continuous or discrete returns in order to get the whole sum of all returns? In some books they prefer calculating the continuous returns (natural logarithm(closing price/ opening price), but I donīt understand the whole concept about it..

Please help me!

Reply With Quote
 
  #2 (permalink)
Quick Summary
Quick Summary Post

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.

 
  #3 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,651 since Mar 2010
Thanks: 4,226 given, 25,600 received
Forum Reputation: Legendary


I do not think that there is something like a continuous return. Real returns are always discrete.

From real returns you can calculate a rate of returns (similar to an interest rate). And that rate of returns could be discrete of continuous. For fancy option formulas like the Black-Scholes formula continuous interest rates are used. However, I do not think that it is necessary to calculate a continuous rate of return for a number of trades.

For trade evalaution it is sufficient to calculate simple returns or logarithmic returns. The main difference is the way you compound returns. For simple returns compounding is achieved by multiplying returns, logarithmic returns can be compounded by adding them up.

If you feel uneasy with logarithmic returns, just use simple returns.

Reply With Quote
The following 2 users say Thank You to Fat Tails for this post:
 
  #4 (permalink)
Elite Member
Denver, CO
 
Futures Experience: Beginner
Platform: NinjaTrader
Broker/Data: NA
Favorite Futures: NA
 
Posts: 60 since Jan 2010
Thanks: 168 given, 7 received


Fat Tails View Post
... For trade evalaution it is sufficient to calculate simple returns or logarithmic returns. The main difference is the way you compound returns. For simple returns compounding is achieved by multiplying returns, logarithmic returns can be compounded by adding them up....

Do you mind if I ask a question regarding this?

I don't understand a lot of what you are saying but it reminded me of a presentation i saw, given by a relatively young kid who won the world cup of trading.

I didn't totally understand what he was saying (over my head), but from what i gathered his strategy is successful almost entirely because of how he compounded returns.

Did i misunderstand, or can compounding returns (and adjusting position sizes accordingly (for instance)) really make that much of difference?

I apologize in advance if im not making sense...most of this is over my head but i just had to ask.

Thanks

Reply With Quote
 
  #5 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,651 since Mar 2010
Thanks: 4,226 given, 25,600 received
Forum Reputation: Legendary


SuperBliss View Post
Do you mind if I ask a question regarding this?

I don't understand a lot of what you are saying but it reminded me of a presentation i saw, given by a relatively young kid who won the world cup of trading.

I didn't totally understand what he was saying (over my head), but from what i gathered his strategy is successful almost entirely because of how he compounded returns.

Did i misunderstand, or can compounding returns (and adjusting position sizes accordingly (for instance)) really make that much of difference?

I apologize in advance if im not making sense...most of this is over my head but i just had to ask.

Thanks


Mathematically, all you need is a strategy that has a positive expectancy.

Once you have identified a small edge, compounding can turn that edge into giant profits.


For a beginning trader it is important

(1) to understand the markets and identify an approach to trading with a PROVEN edge
(2) to develop the skills - mainly discipline and mindset - to trade that system

The advanced trader should focus on position sizing and compounding. The most important task becomes

(3) to keep the risk of ruin low and at the same time compound profits


Yes, I totally agree that compounding of returns makes a difference.

But the edge comes first, discipline and mindset come second, and then position sizing and compounding make the difference between just an above average and a top tier trader.

Reply With Quote
The following 2 users say Thank You to Fat Tails for this post:
 
  #6 (permalink)
Elite Member
Denver, CO
 
Futures Experience: Beginner
Platform: NinjaTrader
Broker/Data: NA
Favorite Futures: NA
 
Posts: 60 since Jan 2010
Thanks: 168 given, 7 received

Thanks for that extremely clear and
understandable (not over my head) explanation.

"Mathematically, all you need is a strategy that has a positive expectancy."
I have been exploring ways to get similar results to the ones VanTharp said he got in one of his books...he said he and a buddy worked out a system that was profitable using random entries and exits. I completely believe he did although he didn't go into details...a buddy of mine thinks he exaggerating or lying. What are your thoughts on that?

"Once you have identified a small edge, compounding can turn that edge into giant profits."
When you say compounding are you saying in the 'financial formula' sort of way or do you mean compounding through other means?

"...(3) to keep the risk of ruin low and at the same time compound profits"
I recently went over the 'turtles' position sizing formula...very interesting and useful i think...the author said he had moved on to much more sophisticated formulas ... as of now my position sizing is strictly within the realms of a series of trades, not in the bigger picture of a basket of strategies trading a basket of assets in a basket of markets, etc. if possible, would you be able to give me an idea of how i can start learning to use the benefits of more sophisticated position sizing?

Reply With Quote
 
  #7 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,651 since Mar 2010
Thanks: 4,226 given, 25,600 received
Forum Reputation: Legendary


SuperBliss View Post
"Mathematically, all you need is a strategy that has a positive expectancy."
I have been exploring ways to get similar results to the ones VanTharp said he got in one of his books...he said he and a buddy worked out a system that was profitable using random entries and exits. I completely believe he did although he didn't go into details...a buddy of mine thinks he exaggerating or lying. What are your thoughts on that?

With random entries and exits you will not be able to generate profits. The expectancy for each trade is zero before commissions. If you deduct commissions you will have a negative expectancy. Appropriate position sizing can only improve returns of a strategy with a positive expectancy.


SuperBliss View Post
"Once you have identified a small edge, compounding can turn that edge into giant profits."
When you say compounding are you saying in the 'financial formula' sort of way or do you mean compounding through other means?

Compounding is achieved by adjusting the trade size as a function of your capital. Basically you reduce your position after a loss and you increase it after a win. There are several ways of doing this. One is known as fixed-fractional betting. There are a few threads in this forum which elaborate on this subject.



SuperBliss View Post
"...(3) to keep the risk of ruin low and at the same time compound profits"
I recently went over the 'turtles' position sizing formula...very interesting and useful i think...the author said he had moved on to much more sophisticated formulas ... as of now my position sizing is strictly within the realms of a series of trades, not in the bigger picture of a basket of strategies trading a basket of assets in a basket of markets, etc. if possible, would you be able to give me an idea of how i can start learning to use the benefits of more sophisticated position sizing?

The turtles were trend followers. They used volatility adjusted stops. Their position sizing was limiting the loss to 1% of account equity. This means that if a trader had a trading capital of $ 100,000, he was allowed to risk $ 1,000 per trade. Whenever the capital increases due to winning trades, the risk is increased, as it always stays at 1% of the trading capital. After a losing trade the capital is decreased to maintain the risk of ruin at a constant level.

Reply With Quote
The following 3 users say Thank You to Fat Tails for this post:
 
  #8 (permalink)
Elite Member
Denver, CO
 
Futures Experience: Beginner
Platform: NinjaTrader
Broker/Data: NA
Favorite Futures: NA
 
Posts: 60 since Jan 2010
Thanks: 168 given, 7 received


Fat Tails View Post
...With random entries and exits you will not be able to generate profits. The expectancy for each trade is zero before commissions. If you deduct commissions you will have a negative expectancy. Appropriate position sizing can only improve returns of a strategy with a positive expectancy...

i understand ... i guess i assumed (wrongly im sure) that a truly random entry and exit algorithm (using a 1:1 risk reward) would have a 50% win loss ratio over many many trades...


Fat Tails View Post
...Compounding is achieved by adjusting the trade size as a function of your capital. Basically you reduce your position after a loss and you increase it after a win. There are several ways of doing this. One is known as fixed-fractional betting....

recently, after fumbling around with contract size betting 'algorithm' spreadsheets for hours upon hours i happened to stumble upon the usefulness of that phenomena "reduce your position after a loss and you increase it after a win" ... i will definitely look into fixed-fractional betting .. thank you

are there any other simple techniques (like fixed-fractional betting) that improve returns or reduce risk on a trader's 'edge'?

Reply With Quote
 
  #9 (permalink)
Trading Apprentice
Chicago + IL/USA
 
Futures Experience: Beginner
Platform: CTS
Favorite Futures: ES
 
Posts: 20 since Sep 2014
Thanks: 5 given, 12 received


youngbloodtrader View Post
Hi!

I am entering the returns of my trades into an excel sheet, to calculate statistical data. I calculate the returns in percentages (closing price/ opening price)-1 and came across a problem: Do i need to calculate the returns as continuous or discrete returns in order to get the whole sum of all returns? In some books they prefer calculating the continuous returns (natural logarithm(closing price/ opening price), but I donīt understand the whole concept about it..

Please help me!

returns are normally-distributed while prices are log-normally distributed.

Reply With Quote

Reply



futures io > > > (Mathematician needed) Continuous vs. discrete returns?

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Linda Bradford Raschke: Reading The Tape

Elite only

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

January

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
returns indicator netfin NinjaTrader 1 August 23rd, 2014 02:22 PM
Mathematician/Trader bob314159 The Elite Circle 20 June 15th, 2014 11:56 PM
mathematician/trader sought bob314159 Hire a Consultant or Programmer 0 March 27th, 2014 10:24 AM
A Mathematician/Hacker on Wall St. baxline Traders Hideout 13 January 19th, 2014 07:27 PM
Mathematician who changed the history. HedgeFundAleksan News and Current Events 1 October 12th, 2013 12:01 PM


All times are GMT -4. The time now is 08:29 AM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-12 in 0.14 seconds with 35 queries on phoenix via your IP 54.90.207.75