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LAW OF LARGE NUMBERS
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LAW OF LARGE NUMBERS

  #11 (permalink)
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Where IS the niche for the individual trader?


Fat Tails View Post
The law of large numbers assumes that there is an underlying probability or expectancy that does not change during the sample period for your statistical experiment ...

... The forward optimization tells me, whether my approach was simple enough to be valid....

... The breakout strategies that worked for the turtles do not work today, as new predators were born that fed on them. Trend following strategies lead to bubbles and increased volatility, attracting malicious predators not allowing them to rush to the exits and leaving behind them destruction and fear....

. Where is the niche for the individual trader? ... Sophistication does not help, but simplicity. Which are the behavioural patterns that have not changed during the sample period?



Very well said ... and me putting on my devil's advocate hat ... ... reading your words in this message, says for me [suddely seeing the light in the tunnel, wondering if its the end or THE END?]] , that maybe David Aronson Amazon.com: Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals (9780470008744): David Aronson: Books: Reviews, Prices & more showed that very simple strategies dont work in the long run ... and its not that I disagree with you in total, I wonder how long ago that those predators ate up the simple strategies ???

So, I some much love your command of the English language, and hope to see many more kilobytes of it.

My question is: do we go all the way back to point and figure charts to see true edge for individual traders? What is your thoughts? Where is the line between simplicity and too simple to work?

Jon

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  #12 (permalink)
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tigertrader View Post
i knew you would say that...lol

Yes, but if you had written the answer in my place, I would have found something different. In this way posting here is very similar to creating algorithmic preadators that feed on other algorithms.

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Fat Tails View Post
Yes, but if you had written the answer in my place, I would have found something different. In this way posting here is very similar to creating algorithmic preadators that feed on other algorithms.

That's quite alright...I don't mind setting them up for you to knock down. IMO, the raison d'etre of this forum is to provoke thought by expressing different points of view. IMO, you are the perfect agent provocateur, because your arguments are always based on facts and reason. I always respect logical appeals to my views, and find your counterpoints to be very informative, thought provoking, and elegant.

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Myshkin,

I agree with everything you wrote. The guys who own Susquehana are all ex-professional poker players, and of course Brett Steenbarger is on a campaign to recruit poker players to be trainees for the hedge fund he is associated with. Good poker players make good traders, and conversely, good traders make good poker players, for the very reasons you enumerated.

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tigertrader View Post

It stands to reason then, that the better your skills and technique, the more you should trade. While LLN is important because it "guarantees" stable long-term results for random events, it follows that it is also important that your sample of trades is large enough to maximize the number of successful outcomes from your skillful trades and therefore maximize your earning potential.

You can't find yourself subscribing to the theory that " you're only as good as your last trade. " If you are going to trade for a living, there is no last trade, only the next trade. Whether, your last trade was a winner or a loser, it has absolutely no bearing on the outcome of your next trade. Look forward to taking your next trade, because it's going to be the best trade you have ever made. At least, that's how you should be approaching it.

Unlike gambling, a winning streak by a trader will NOT eventually be overcome by the parameters of the game, unless he somehow convinces himself that this is his inevitable outcome. Trading is not gambling where the house has the edge; trading is a performance based activity that requires skill, technique, experience, and practice. Most important though, the trader must have the right attitude, focus, patience, and self-confidence, and then the trader will be the one who possesses the edge.

Counterpoint:

Charlie DiFrancesca said in his famous lecture on pit trading that the pit is not a casino. The point he was making was that in the pit the odds favor the disciplined local who earns the bid/ask spread. That was certainly true in the time before electronic trading and more "democratic" access tightened the bid/ask spreads and allowed highly capitalized R&D firms to have equal or superior access to the markets. Charlie was making the same point you are making about the expected returns of a trade. With the odds in your favor, your highest expected value comes from a long string of small bets, like being the slot machine in a casino.

I was never a trader who stood in the pit all day trying to wring that edge out of the market as many times as I could, even though I understood and agreed with the statistical argument. I did not achieve consistent profitability until I started shooting for a goal and leaving when I hit it. (As I've said elsewhere, the first month I used that approach was the first of about 80 consecutive months I made money). I think the reason was because, while it was not a casino, I was not a slot machine. Emotion and exhaustion would eventually creep in and ruin my discipline and my results.

The trader I respected most in my pit disagreed with my approach. But if worked for me.

Just my 2 cents. And Fat Tails, you rock!

"You don't need a weatherman to know which way the wind blows..."
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Myshkin View Post
IMHO, on gambling, the similarities between it and trading are closer than most would think if we consider poker to be "gambling" as there are those that can win consistently both because they have great control of their emotions in addition to knowing the probabilities

The problem with comparing trading and poker though is that you can analyze your play to a degree that on a losing streak you can figure out the sum expected value of the bets you made and figure out if you are losing because of variance(and just need to wait for the law of large numbers to converge) or are simply playing poorly.
With trading, you don't know if it is variance or playing poorly as the probabilities are unstable and moving.
If anything professional sports betting is far closer to trading than poker. Sabermetrics and baseball betting I would imagine is the closest as you are trying to infer future probabilities from past data but also not getting bogged down with microstructure like calculating ball speed.

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