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Noise: A source of your errors?


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Noise: A source of your errors?

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  #11 (permalink)
 MNSTrading 
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So, speaking of noise, how can we get less of it? Ie, which markets are more likely to trend than range? Has anyone seen good research on this? Mandelbrot had a number he called H where the higher the H value the more likely trending but I think it was disproved eventually.

For my system this would be VERY helpful to know which markets trend more.

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  #12 (permalink)
 SodyTexas 
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Sandpaddict View Post
Yes I agree noise is VERY measurable.

I would say though just because it has a trend up or down doesn't mean as much as measurements.

Standard Deviation, linear regression, and the least squares concept are better measurements of what we are measuring I think.

This paper...
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3243130

...although slightly off topic, but I dont think so, highlights the issues with standard measurements. Such as the sharpe ratio and it's cousin the SQN.

Again although not directly related to noise it's so profound you can see the glaring measuring errors within the existing tools.

Profitably and Quality Measurement.

PQM: See formula below. It's just beautiful! And far more accurate than anything before it as far as I'm concerned.Attachment 313102

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Thanks for sharing the formula, I will take a look.
At first glance I am excited to tear it down, it looks promising.

FYI, standard deviation of price is not the same as noise. You can have a low deviation and price moving sideways. Would you consider that noise?

Sody

Sody

"The great Traders have always been humbled by the market early on in their careers creating a deep respect for the market. Until one has this respect indelibly engraved in their makeup, the concept of money management and discipline will never be treated seriously."
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  #13 (permalink)
 Sandpaddict 
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MNSTrading View Post
So, speaking of noise, how can we get less of it? Ie, which markets are more likely to trend than range? Has anyone seen good research on this? Mandelbrot had a number he called H where the higher the H value the more likely trending but I think it was disproved eventually.

For my system this would be VERY helpful to know which markets trend more.

That's kinda funny cause Mandelbrots main point was market fractilitly. His H is just a representation for the succession of fractals (which visually look like Hs imbeded in smaller and larger Hs).

Maybe it's because IF the the geometric mean is rising fractally that's a trend?

On the topic of getting rid of noise I have a strangely fitting analogy.

In thinking about arguing with my wife in the past I am always AMAZED at her ability to have %100 CONVICTION in what she's arguing with me about.

It NEVER occurs to her (me as well I'm sure) that maybe she's wrong, or at least not anywhere near %100 correct. But shes ACTING as if she's %100 correct.

The difference between what she believes and the truth is the "noise".

If it's a binary situation and shes right there's NO noise.

If she thinks (is convinced) "it" happened at 9am and I think (am convinced) it happened at 9PM and it turns out to HAVE happened at 10AM she is MORE right and has far less noise in her judgement in that instance than I did.

How does this relate to noise and the market?

Well you can ARGUE with her (the market) or you can try to manage YOUR RESPONSE to the situation. Realize the market can be as irrational as she wants and it's up to YOU to ADAPT!

She will always have her opinion however irrational it seems to you.

But she is always right in this case. In trading that is. The market is ALWAYS right. Always!

So now the issue is YOUR noise. The noise in your system is the difference between what you believe and what the market believes.

But remember... SHES always right. Meaning ANY discrepancy between you and her is YOUR noise. Your beliefs. Your decisions. Your noise! Because in THIS relationship, any discrepancies, by defacto, puts YOU in the wrong.

Depending on your relationship you will generally have good relationship or a rather turbulent one and within that you will have good days and bad days relatively.

That's variance within a larger structure. Standard deviation of the mean. Not necessarily "noise".

So again you how do you deal with noise as defined as dealing with the unknown is to ADAPT... or have a system/strategy that adapts to the fact that we always have "noise" as we are dealing with the UNKNOWABLE.

That's why the closest thing to a TRUE holy grail is diversification. Because no one knows the future.

I hope this makes it more clear the way I see it.

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  #14 (permalink)
 Sandpaddict 
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SodyTexas View Post
Thanks for sharing the formula, I will take a look.
At first glance I am excited to tear it down, it looks promising.

It is the first time I was able to understand why I intuitively dislike standard measurements. It comes back to "noise" lol. The current models are not totally wrong , there just not totally correct.

Please read the paper and get back to me. It's not an understatement to say this paper "blew me away". And the math explains exactly how this improvement in trader system measurement will put us just a little closer to the truth.

Science says we can't PROVE it's right but we can disprove when it's wrong.

This I believe WILL become the standard for the foreseeable future.
SodyTexas View Post
FYI, standard deviation of price is not the same as noise. You can have a low deviation and price moving sideways. Would you consider that noise?

No I would not. Absolutely not. They are not the same. Thats like comparing apples and cats. Lol.

My apologies as I obviously gave that impression.

Std Dev is the measurement of the variability around the mean.

That is NOT noise at all. Noise is the fact you don't know what the FUTURE deviation of the mean WILL be. The DIFFERENCE between your belief about what will happen and what transpired is noise. Std Dev is only the deviation of the ACTUAL mean.

And that also IS the problem with conventional metrics. They conflate the two. Models are NOT reality.

Again I hope I'm making more clear than less.

Thank you. Great discussion.

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  #15 (permalink)
Cutloss
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Noise traders are retail traders it is us! Listen do I know when you guys are going to buy the es the nq crude oil google? No! Do u know when i am going too?

Do we do enough follow thru volume individually to keep a trend? To forma trend do we say together let's sell 5000 lots es. Nope we are the noise.

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  #16 (permalink)
 Sandpaddict 
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Cutloss View Post
Noise traders are retail traders it is us! Listen do I know when you guys are going to buy the es the nq crude oil google? No! Do u know when i am going too?

Do we do enough follow thru volume individually to keep a trend? To forma trend do we say together let's sell 5000 lots es. Nope we are the noise.

Agreed! Nobody does but the aggregate is the result.

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  #17 (permalink)
Cutloss
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The aggregate is the small amount of noise we create cumulatively throughout the day. I mean some guys trade 1 lots maybe up to 10 lots and some do 1 trade a day or maybe 30 or 40 but that's still chump change and noise. We may jump from nq to es to oip or the dow futs or the russell on a whim a random chart indicator or we feel like it high or low and click boom.

Wall street is much different. If I run a 12 billion dollar fund and I want to hedge in the sp500 es futs tomorrow. I send citadel an order to get me hedged along with 50 other large customers. I give citadel a range of pricing and they try to wow me with even better execution and that's why they are informed. The order flow is known ahead of time. Now during the day we noise traders along with other smaller algos and competing hft as well as large traders all throw in some noise throughout the day that the execution strategists must deal with inland it goes way beyond twap or swap or pin pricing. That is not noise because its extremely large orders. During the flash crash in 2010 one outfit out of Kansas was starting a hedge of 65,000 es futures short. Yes 65,000! And that was normal size for them and they had an execution platform set up and it crushed the mkt. That was truly one of the causes if u ask me anyway that's not noise it is a huge concerted effort over time to sell 65,000 es over and over until all are done. That's informed trading. They may let off the seals hoping price rises again to start selling again but that's dependent on how many noise traders and stops and other trades have been hit to help reduce slippage. It's truly never...oh that trend line was broken lets sell 65k es. No they fundamentally along with some technicals feel like it's time to hedge..the point is that those types of trades are not noise.

Here is a real world example. Let's talk about a funeral procession. The police escort for the 200 cars in a row who block traffic and allow the flow with no impediments is the hft or execution company. This is not noise. We can preplan a route we can deal with a bicyclist that gets in our way. Etc. Now let's say those 200 cars are leaving the church to head out to the grave site with no escorts no hft no execution company. They would all take different routes to get there. Some would show up at lots of different times some would get lost. Parking would be another noisy situation since everyone arrives separately!! That is noise!! That is retail..

Lastly..for every buyer there is a seller. Its highly possible that hft and execution firms are selling 1 tick higher and buying a tick lower for another customer not kidding those trends can be just execution platforms some buying some selking..if one stops then the trend stalls or changes. That is not noise..retail jumping into and out of the trend or against the trend can cause temporary noisy issues depending on the aggregate of noise traders but we cancel each other out a lot.

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  #18 (permalink)
 Sandpaddict 
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Cutloss View Post
The aggregate is the small amount of noise we create cumulatively throughout the day. I mean some guys trade 1 lots maybe up to 10 lots and some do 1 trade a day or maybe 30 or 40 but that's still chump change and noise. We may jump from nq to es to oip or the dow futs or the russell on a whim a random chart indicator or we feel like it high or low and click boom.

Wall street is much different. If I run a 12 billion dollar fund and I want to hedge in the sp500 es futs tomorrow. I send citadel an order to get me hedged along with 50 other large customers. I give citadel a range of pricing and they try to wow me with even better execution and that's why they are informed. The order flow is known ahead of time. Now during the day we noise traders along with other smaller algos and competing hft as well as large traders all throw in some noise throughout the day that the execution strategists must deal with inland it goes way beyond twap or swap or pin pricing. That is not noise because its extremely large orders. During the flash crash in 2010 one outfit out of Kansas was starting a hedge of 65,000 es futures short. Yes 65,000! And that was normal size for them and they had an execution platform set up and it crushed the mkt. That was truly one of the causes if u ask me anyway that's not noise it is a huge concerted effort over time to sell 65,000 es over and over until all are done. That's informed trading. They may let off the seals hoping price rises again to start selling again but that's dependent on how many noise traders and stops and other trades have been hit to help reduce slippage. It's truly never...oh that trend line was broken lets sell 65k es. No they fundamentally along with some technicals feel like it's time to hedge..the point is that those types of trades are not noise.

Here is a real world example. Let's talk about a funeral procession. The police escort for the 200 cars in a row who block traffic and allow the flow with no impediments is the hft or execution company. This is not noise. We can preplan a route we can deal with a bicyclist that gets in our way. Etc. Now let's say those 200 cars are leaving the church to head out to the grave site with no escorts no hft no execution company. They would all take different routes to get there. Some would show up at lots of different times some would get lost. Parking would be another noisy situation since everyone arrives separately!! That is noise!! That is retail..

Lastly..for every buyer there is a seller. Its highly possible that hft and execution firms are selling 1 tick higher and buying a tick lower for another customer not kidding those trends can be just execution platforms some buying some selking..if one stops then the trend stalls or changes. That is not noise..retail jumping into and out of the trend or against the trend can cause temporary noisy issues depending on the aggregate of noise traders but we cancel each other out a lot.

Ok. I'll have to just respectfully say I disagree. I'm not saying I'm right it's just what I believe.

Again for me just because they are large or are HFTs ect. doesn't mean they know what's going to happen. There are errors in thier models too. No matter how sophisticated. And that is noise.


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  #19 (permalink)
Cutloss
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There is no debate about noise traders..retail versus informed traders institutional and professional money who get large orders from their customers for execution!

The Robin hood retail order flow allows the hft and execution desks to preplan and incorporate that data into the models to make sure they release n hold back buys n sells at opportunistic moments for their customers.

It's not even questionable. It is what it is that's the market. Same as when a pit trader or floor broker held a sell stop for 500 so futures on his pocket gtc. He was informed!!! He knew he had to sell a ton at that price ahead of time. That's an informational advantage or edge. It's not news information it is actual orders. It is how wall street works.
There are tons of research papers on retail noise traders just google it

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  #20 (permalink)
Cutloss
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