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A Time Traveler and a Trade
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A Time Traveler and a Trade

  #11 (permalink)
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lax99 View Post
I had a similar discussion a little while ago which I think follows the same lines above.

Suppose you are going to lose 8 ticks over a string of trades and that there is no way to avoid these losses.

How would you rather do it? One 8 tick loss? Two 4 tick losses? Or a combination of 12 scratches and -1s which eventually stick you -8?

Commissions obviously apply. What is more worth it for a trader? Would you take few trades and pay as little as possible in transaction fees? Or would you take as many trades as you could, pay commissions on all of them, and still end up in a drawdown?

I was going to say something on this part too, but decided to pass on it. I didn't quite understand the question you were presenting.

If I'm going to lose 8 ticks before commissions, then I don't want to take 8 separate 1-tick pre-commission losses, plus the commissions on each of the eight trades. Who would?

If the question is about taking a certain net loss, including commissions, I wouldn't care how it was distributed, since the result would be the same.

Since actual P/L is always net including commissions, I don't really get the premise. Can you help me understand what you mean?

Bob.

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  #12 (permalink)
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bobwest View Post
I was going to say something on this part too, but decided to pass on it. I didn't quite understand the question you were presenting.

If I'm going to lose 8 ticks before commissions, then I don't want to take 8 separate 1-tick pre-commission losses, plus the commissions on each of the eight trades. Who would?

If the question is about taking a certain net loss, including commissions, I wouldn't care how it was distributed, since the result would be the same.

Since actual P/L is always net including commissions, I don't really get the premise. Can you help me understand what you mean?

Bob.

I agree that from a pure P&L standpoint it makes sense to just take one -8 and pay one round turn. This is the point that a buddy of mine agreed with.

My thought was that I'd rather get as many looks as possible for a winning trade, instead of just swallow the -8 on one trade. If you lose those ticks over twelve or twenty trades then yes, you're paying a good deal on commissions. But you're also seeing a whole lot more market action, you're in the flow, and you're better equipped to make a decision about whether you're seeing the market well or not.

Losing on two or three trades in a row is almost a certainty. Losing on 8 in a row means that you're not seeing the market well, and that you might have to take a step back for a moment.

The whole premise of the question is what the string of losers means for you and your trading going forward. Yes, you've lost more money by taking more trades. But you've paid for information which might suggest that you're in a losing streak and that you need to cut back.

Going -8 on two trades doesn't give you much information. It could very well be the start of a winning run! But you won't know that it's the start of a losing streak until a few more trades go through. At that point you might be -20!

It's easy to argue one point or the other which is why I posed the question. It's always interesting to see what traders think about it.

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  #13 (permalink)
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lax99 View Post
It's easy to argue one point or the other which is why I posed the question. It's always interesting to see what traders think about it.

Yes.

Bob.

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  #14 (permalink)
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@lax99 I am assuming you are referring to taking several small losses vs one large loss. I will try to elucidate some of the important themes that are relevant for this topic. The first theme is this idea of a relationship between gross profit and net profit. Normally if you have an edge then if you take more mediocre trades, that is trades with a lower profit factor, you will have the potential to increase the gross profit and subsequently the net profit constrained by your trading costs. But, your quality of trade will decrease. So, you have this relationship where you have the potential to make more money but any given trade is a lower quality.

On the other hand, you can decrease your trading frequency thereby increasing your quality of trade. The downside is you have fewer samples to work with and thus you need to take more risk on any given trade. So, there is a relationship actually where you can actually lose more money taking better trades then worse trades. Take it to the extreme, take a system that has an edge and let's imagine you take the very best trade in any given year that the system produces but yes you are taking the best trade but you're not taking enough trades to profit at statistical confidence. Something that is worth understanding is that if you have a 55% probability of making more then losing on a trade for a given event then your probability of making money if you trade 100 events is way higher then if you take one event. This is really basic but it is important to understand. That's why a casino can make money because even though the edge is small if you multiply that and limit the risk then the certainty of making money becomes very high. In order to take advantage of a small edge, you need to strictly the limit the risk and you need a lot of events.

Obviously, everyone would like to be the casino but the reality is that is difficult to do. So, if you are taking the view of the outsider then you may prefer to take the view of trading larger and less frequently because it decreases any relative disadvantage you might have.

We can look at this from another perspective. So, obviously if we know a trade is a higher probability of losing and we can scratch, that is break even, on that trade then it is obviously better to do that. The problem with that notion is that below a certain threshold a human or discretionary trader simply cannot compete. Yes, it is sometimes but that can easily become illusionary. Beyond that, even if it were possible, it is not clear that you could use this to your advantage if you were trying to trade a larger trade. So, this has do with the fundamental wavelength and periodicity of information. Let's imagine your fundamental information you are trading on, your edge, is hourly bars. If we imagine the range on that bar is 10 points and 60 minutes. Right, if you're trying to act on that wavelength on information with only say 1 minute or 1 point, you're acting on basically 1% of the information relevant to your frequency. So, there are multiple constraints that limit ones ability to control or limit risk and those limits are (1) Your ability to react, (2) The frequency of your edge, and (3) Your trading costs. Because other trades may have "vertical edge" then the trading costs is important beyond (1) and (2) and act as additional constraints.

The final consideration is the probability of a sustained movement and the degree of horizontal versus vertical movement in the market. So, stop losses basically work when markets trend and they don't work when markets don't trend. The idea of whether or not you should take a loss as such is based on the probability the market will trend against you sufficiently to take you out of the trade. The other symbiotic concept is the horizontal versus vertical movement in the market.

The real answer is that you may not have a choice on this. There is a limit to any ability to constrain losses.


Last edited by tpredictor; May 19th, 2018 at 05:12 PM.
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  #15 (permalink)
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It's like you're writing a dissertation on trading, probability, position sizing, and expectancy. I really can't make sense of this.

Each trade is unique and each moment is unique. You won't know whether a trade "has a higher probability of being a loser" until you put it on and see the action develop afterwards. Expectancy also evolves with the more trades that a trader takes. He/she sees more action, gets better at reading the action, and ideally gets better at making profitable calls.

Would you take 1 loser for -8 or 8 losers for -1?

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  #16 (permalink)
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Interesting what you say lax99. The common thinking is that mind goes full retard when we put on a trade which is why the 'thinking' needs to be done beforehand. I find that being in a trade sharpens mind exceptionally well.

I do a brief analysis first thing in the morning and then jump straight in on small size. This is not to see whether I'm in 'sync with the market flow' or any of that nonsense. It's my version of taking a cold shower to get fully awake and alert.

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  #17 (permalink)
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If he comes from the future, why would he need to speak in probability when he already knows the outcome.

On a more serious tone, as Warren Buffet once said, don't risk what you have for something you don't need.

If you are good at trading, you are eventually going to quadruple your net worth. If you are not good, unless that traveler appears again, you are going to lose those gains.

As admiral Ackbar also said, it's a trap!

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Lukebaires View Post
If he comes from the future, why would he need to speak in probability when he already knows the outcome.

Because he's screwing with you.

Also, if he just told you, there would be no thread about the question....


Quoting 
On a more serious tone, as Warren Buffet once said, don't risk what you have for something you don't need.

If you are good at trading, you are eventually going to quadruple your net worth. If you are not good, unless that traveler appears again, you are going to lose those gains.

True enough.

So your choice would be to ignore him, which also means there would be no reason for the question, but it is probably the best response.

Bob.

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  #19 (permalink)
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bobwest View Post
Because he's screwing with you.

Also, if he just told you, there would be no thread about the question....



True enough.

So your choice would be to ignore him, which also means there would be no reason for the question, but it is probably the best response.

Bob.

Actually, although I still think you had a good answer, I was wrong about what I said about the reason for the question.

The real question is, if you have very good reason to believe that a given trade has a high probability of having a great return, should you bet the farm on it? And the answer, at least what I think is the answer, is "No, you shouldn't ever bet the farm on anything." Otherwise, at some point you will blow up and you can't come back.

The time traveler was just a way to pose the question.

Bob.

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  #20 (permalink)
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@lax99 If you read my previous answer, you will see the relevant factors involved. The answer to the question is not as important as the understanding.

This is a "false choice problem". How much action/information are you able to infer from 1 tick? And what certainty can you scratch a trade for only 1 tick of risk? That's what matters. And by scratch, I only call a scratch a true scratch if it never ticks more then that against you. I suspect a lot of traders are calling "scratch" trades where they take it off at break even but it already went underwater. That's not a scratch. It can be a useful technique but please do not call that a scratch because there is no guarantee it ever comes back! That's just closing a a trade off at break even. There might be times when you can scratch a trade for 1 tick or less risk but at what certainty? Is it 50% of the time? 30%? 15%? And what happens when you miss it? It is very relevant because if you don't know this then you can fall into trap of "illusion of risk free trade". Also what happens when you scratch at trade that eventually works? Let's just say, I think discretionary traders in today's markets unlikely to be able to scratch many trades effectively.

Your ability to improve results as action develops is based on the efficiency of the markets and ability to integrate Bayesian probability theory. If every trade is a unique event then you cannot improve your results from knowledge of prior trades. You can only do that if the trades have dependency.

I mean the way this question is posed is would you rather lose $12.50 on a trade or $100? If all things are equal, I will prefer the small loss because the standard deviation of returns will be lower. However, all things are not equal. And you cannot control the bet size in futures. This was one of the things I pointed out that because futures have a low granularity (poor divisibility) then it makes risk control dependent on the account size.



lax99 View Post
It's like you're writing a dissertation on trading, probability, position sizing, and expectancy. I really can't make sense of this.

Each trade is unique and each moment is unique. You won't know whether a trade "has a higher probability of being a loser" until you put it on and see the action develop afterwards. Expectancy also evolves with the more trades that a trader takes. He/she sees more action, gets better at reading the action, and ideally gets better at making profitable calls.

Would you take 1 loser for -8 or 8 losers for -1?



Last edited by tpredictor; May 20th, 2018 at 12:09 PM.
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