Killer Instinct and the Home Run Mentality

January 31st, 2011, 09:12 AM

tigertrader

No doubt about it! I should have included the disclaimer, " Do not try this at home! No animals were harmed! No trees were cut down! No steroids or mood enhancing drugs were used! You didn't see me do it and can't prove a thing!" LOL

The "art" or visceral component of trading is an intuitive sense a trader develops about the market after continuously having watched and studied price action and market behavior for an extended period of time. It is not an end state but a dynamic one, always adapting to changing and evolving market conditions and drivers of price. And yes, it takes a great deal of time and experience to sufficiently build up your subliminal data base.

I'm in agreement with the disclaimer. There are many new traders reading these threads in order to shape their views on trading. In that respect, I think we should also refrain from making gambling analogies, because people regard gambling as a game of luck, and don't realize that professional gamblers constantly make pure statistical analysis in their mind in gambling decisions. The gambler playing blackJack, and makes the decision to stay at 19, did not make that decision because he 'felt' the next card will NOT be a 2, he made that decision because his brain automatically calculated that the statistical chance of getting a 2 was very slim.

I have no problem with referring to trading as Art either. For some traders, I think it is an art. Going on with that analogy, you have to ask yourself how many painters, and artists in the world are making a living from their art, and how many are paying the bills by waiting tables? If you fall in the Art camp, you have to ask yourself, Am I special enough an artist, that I will be part of the few to make a living with their art, or do I have to wait tables to pay the bills. If I don't have that artist gift, do I believe that someone can teach it to me in 6 months, 2 years, 5 years, or at all? Your answer to those question will determine which camp you choose.

I personally believe that artists are born and have a special skill or gift. I believe you cannot pick someone off the street, and teach him to paint like Cezanne. I am not a trading artist, I know I don't have that special something that traders who practice the 'discretionary arts' have (or discretionary voodoo, as someone referred to it in another thread). So, I staked my flag in the mechanical camp, and chose to get myself a 'paint by numbers' kit instead

. Each trader must make that decision for themselves.

Unfortunately, too many traders buy into the idea that a $1200 course, giving them 3 discretionary setups, will turn them into Picasso in 6 months. That's why traders have such a high failure rate. When you go back to that vendor and tell him his system is crap, he will tell you no, your discretion is crap, and for every 3 reasons you will give him that you took a losing trade, he will give you 6 that you should not have taken that trade, that is the nature of the 'discretionary arts'. You better own it, you better trust it, because on any given day, depending on how you feel, it will make or break you.

January 14th, 2015, 06:28 AM

tigertrader

If your trading consists entirely of statistical arbitrage and to some degree mean reversion trading, then it makes sense to dispense with all subjectivity and mathematically model your optimal position sizes according to the amount of risk you are willing to incur. But, while this approach may sound good in theory, it may not be the case in practice, when it pertains to discretionary trading.

Position sizing based on historical performance implies that all of future performance will follow the same distribution. Even on an intra-day basis the market�s character changes from hour to hour. The time series of price changes from one period may not be drawn from the same distribution as the time series of price changes from the next or the one before it.

Therefore, you cannot use period one�s data to predict period two if we have reason to believe that the two periods were not drawn from the same distribution of price changes. It follows that this phenomena would be even more pronounced from one day or one week or one month to the next, and would compromise any efforts to model your risk or even the market itself. It even calls into question the efficacy of technical indicators that don�t take time-series analysis into consideration.

It stands to reason that if the market is dynamic so should be your trade management. It should not be based on predetermined parameters that were derived from a predetermined distribution. It would be like betting and playing every poker hand the same way, irrespective of the cards that you were dealt. Instead a successful poker player is cognizant of when the odds are in his favor to go all in. He doesn�t do it pre-flop because everyone would know he had a good hand. Instead he waits until he feels that it is the best time to go all in.

Most traders place great emphasis on entries, are too impulsive on exits, and give little thought to the definition and adjustment of trade size. If they don�t exercise a certain degree of subjectivity by dynamically adjusting their trading size and holding period, they can have a great trading methodology, but a red or modest P&L. The average size of their losers will swamp the winners, and commissions and slippage will eat them alive.

Trading mechanically may be relevant strategy for stat arb, but discretionary trading ( and tournament poker) requires a creativity that blends math and art, and is a trait that is shared by all great traders.

I agree, and even though my approach has substantial elements of Statistical Arb there is still no substitute for applying observation, experience and market knowlege for improving profitability. aka Price Action This flies in the face of accepted Technical Analysis Theory and generally accepted trading practice. I think it all depends on whether or not you believe the markets are random and therfore quantifiable, knowing when to step up and have a crack is not programmable, this is where the essential human element steps up to the plate.
Cheers John

January 14th, 2015, 07:00 AM

monpere

I'm in agreement with the disclaimer. There are many new traders reading these threads in order to shape their views on trading. In that respect, I think we should also refrain from making gambling analogies, because people regard gambling as a game of luck, and don't realize that professional gamblers constantly make pure statistical analysis in their mind in gambling decisions. The gambler playing blackJack, and makes the decision to stay at 19, did not make that decision because he 'felt' the next card will NOT be a 2, he made that decision because his brain automatically calculated that the statistical chance of getting a 2 was very slim.

I have no problem with referring to trading as Art either. For some traders, I think it is an art. Going on with that analogy, you have to ask yourself how many painters, and artists in the world are making a living from their art, and how many are paying the bills by waiting tables? If you fall in the Art camp, you have to ask yourself, Am I special enough an artist, that I will be part of the few to make a living with their art, or do I have to wait tables to pay the bills. If I don't have that artist gift, do I believe that someone can teach it to me in 6 months, 2 years, 5 years, or at all? Your answer to those question will determine which camp you choose.

I personally believe that artists are born and have a special skill or gift. I believe you cannot pick someone off the street, and teach him to paint like Cezanne. I am not a trading artist, I know I don't have that special something that traders who practice the 'discretionary arts' have (or discretionary voodoo, as someone referred to it in another thread). So, I staked my flag in the mechanical camp, and chose to get myself a 'paint by numbers' kit instead

. Each trader must make that decision for themselves.

Unfortunately, too many traders buy into the idea that a $1200 course, giving them 3 discretionary setups, will turn them into Picasso in 6 months. That's why traders have such a high failure rate. When you go back to that vendor and tell him his system is crap, he will tell you no, your discretion is crap, and for every 3 reasons you will give him that you took a losing trade, he will give you 6 that you should not have taken that trade, that is the nature of the 'discretionary arts'. You better own it, you better trust it, because on any given day, depending on how you feel, it will make or break you.

To be honest, if I refer to myself as a trader it is only to be understood within the group I am talking to, generally this would be considered good communication. What I really am is a businessman/speculator who makes many short term business investment decissions and yes I successfully make my living doing this. Everything I do that relates to money is viewed this way by me. I do not use any Technical Analysis Tools in my decission making. I do however use sound business models developed thru skills hard earned and paid for over 30+ years facing challenges that most people couldn't even begin to imagine including all the highs and all the lows several times. I humbly suggest that newby traders gain some of these skills before even attempting to enter the fray. Who knows, they might then decide to give it a miss without paying the forfeit, for the vast majority this would be a smart move. It's surprising how many posts I've read where they stated that if they had known what they were in for they would never had started in the first place. There is no substitute for experience.
I'm not deliberately trying to be a wet blanket, just stating what should be obvious, if people can't accept this obvious reality as displayed on every forum, then how are they going to accept the market realities.
Cheers John

October 5th, 2015, 10:41 AM

monpere

You have $10 to play a game, and you say I will bet $2 until I make a certain profit, or run out of money.
Then you are presented with 2 bets. You believe one to be superior, you say, ok I will take the
inferior with $2, and enter the superior bet with $8. Then, because you don't have a crystall ball,
and there is no guarantee that you will win any single bet even if you 'feel' it's better or not, and you loose
both bets. If you bet $2 on both, you can continue playing. If you bet $8 on the one you felt to be superior, then
if you want to continue playing, you have to pull out your wallet... Refund your account!

Your example proves my point about trading mechanically by the numbers. You said: 'You examined your last 30 trades' (that is historical/statistical analysis); 'You see that on some setups you tend to win more than other setups' (that is system expectancy); 'you should juice those setups' (that is assigning a unit of risk based on expectancy).

So, basically, you are saying you've identified 2 different methods with 2 different expectancies, so you will trade them each differently, as 2 different systems each with it's own expectancy and set level of risk. So you will always risk $100 on setup1, and $200 on setup2 and expecting the statistically determined reward out of each. That is very different then if you trade setup2 with $200 the 1st 2 times you see it, with $500 the next 3 times and with $50 the following time you see it, because you felt differently about it each time. Even if I guarantee you, that you will win 3 of those trades, you have no idea how those wins will be distributed. As luck would have it, you will probably win the $50 entries, and loose the $500 entries. Different story if you trade them all risking the same amount each time. If you don't, very soon you will find you have to... Refund your account.

I'm with the dutchman on this. When I see the markets way out of line you can bet your bottom dollar that I am going to ramp up my size. Like in poker you are only going to get so many premium hands so when they do present you need to get as much as you can for them, successful trading and poker are both about controlled aggression. No refunding of accounts here mate and I've been doing this since probably before you were in short pants.
Cheers John

Killer Instinct and the Home Run Mentality

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Killer Instinct and the Home Run Mentality