# Becoming better at X



## DeepState (3 October 2014)

From skc in thread "Shares Outstanding vs price (darkhorse70)" within the Beginner's Lounge

1. Observe and study the market
2. Develop hypothesis to explain behaviour observed
3. Acquire new knowledge and data to check and test hypothesis
4. If hypothesis is valid, try to develop trading strategies around it
5. Repeat step 1

Everytime you go through this loop you learn something new


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## DeepState (3 October 2014)

DeepState said:


> From skc in thread "Shares Outstanding vs price (darkhorse70)" within the Beginner's Lounge
> 
> 1. Observe and study the market
> 2. Develop hypothesis to explain behaviour observed
> ...




However you have come upon this loop, it is exactly that related to expertise development and is very seriously undertaken by the most elite in any endeavor where skill and effort are related to outcome.  Guys like you.

I read this and was totally rapt. It is rare. If you respond, thanks.

My first question related to high and low uncertainty environments and the application of expertise loops.  Something like chess has no uncertainty.  All the rules are known and never change.  Then you get into financial markets where many things don't make sense for long periods of time.  Feedback loops are long and mashed up with other factors whose interaction is weird and often never seen before, or only slightly similar.  Worse, as soon as someone cracks the market, they get cracked as the markets figure out how they are doing it and replicate it.  That's high uncertainty.  You have a hard time figuring out probabilities at all and outcomes are often a...crap shoot.

You work in trading with pretty short horizons.  My understanding is that this is pretty noisy stuff but your report a month or so ago of your second year in Propex (?) suggests that you are achieving high hit rate and risk managing very well.  Even your trade frequency (which isn't massive for a trader) basically backsolves for very nice average return if you are betting symmetrically without elevating exposure into losses as a pairs guy.  If you are martingale, then I'd come to a slightly different conclusion, but still positive of course given the record you have posted and the limited market directionality.

In my world, that's an amazing outcome.  We don't trade with anything like that kind of frequency but we didn't enjoy the liquidity advantage (at the time...hehe).

*Question(s):* Efficient learning is really tough in this type of environment.  Logically prepared strategies with strong backtest fail with alarming regularity.  Stuff you think is worn out suddenly springs back to life without warning.

How do you cope with such high uncertainty when seeking to learn?  

Do you find that your worldview changes a lot or only incrementally or all over the place depending...

How different is what you are doing today from, say, 6 months ago, 1 yr or 2 yrs ago?  

What is your standard of proof required to change?  

How do you monitor efficacy of your approach to learning?


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## Faramir (4 October 2014)

DeepState said:


> I read this and was totally rapt.



I am rapt with nearly everything written by nearly everyone. Thank you DeepState. I realise that you are looking for an experienced contributor but is it okay if I can add some input??


> Efficient learning is really tough in this type of environment.



How about any learning for a beginner? There are some great beginner threads here. Should I spend more time everyone's posts and less time with pondering what the market is doing?


> How do you cope with such high uncertainty when seeking to learn?



I made mistakes with timing and mis-reading charts. I have to forgive myself and start again.


> How do you monitor efficacy of your approach to learning?



It is very early days for me. I can't answer this.


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## DeepState (4 October 2014)

Faramir said:


> 1. Is it okay if I can add some input??
> 
> 2. How about any learning for a beginner? There are some great beginner threads here. Should I spend more time everyone's posts and less time with pondering what the market is doing?
> 
> ...




1. Hi Faramir, thanks very much for dropping in to this conversation.

2. There is a belief in this approach that it really doesn't matter where we start from.  The belief is that purposeful and targeted examination of what you/I are doing, when combined with informed ways of altering what we are doing, will lead to high expertise over time.  Some of the proponents espouse the 10 thousand hours concept.  It takes 10 k hours to become a really solid expert in any field (chess, violin, law..) and pretty much anyone can do it.  I don't believe that.  I think we all have different gifts which make us unique and our gifts may not be suitable for every endeavor.  I haven't yet seen any 5 ft NBA players in the starting 5.

In relation to getting beyond your self-styled beginner approach, I have the following view.  I am sure there will be a huge variety of other opinions...which makes things harder, but should make you realize there are many paths to Rome.  You need to find your own.

How?  Experience really is the best teacher.  Put yourself at some risk.  Enough to be interested, not enough to hurt you.  Pick the most reasonably sounding way of managing money that you have come across and start there.  See how it goes.  One event is not data, it's anecdote. So you need to examine each outcome and figure out what went right or wrong (both are important) and why.  The best investors read an unbelievable amount and are, yet, very targeted in what they choose to read.  Check out what Munger says to read.  You'll get the idea. This will take many years, but the idea is to help you understand what is actually going on and how you might react to that.  In there will be your own temperament.  How does that knowledge impact you as a person?  Daunting?  Everybody started sometime with zero experience too.

Figure out where the highest useful content per minute spent (as part of a wider picture) can be found.  Do that.  Maybe, for you, it involves a lot of time on the site, or maybe not.  Do what works for you.  Everybody is different, so almost every piece of opinion needs to be seen in that lens. Facts are facts.

You probably have noticed how incredibly supportive most people are on this site when someone genuinely seeks advice.  It's a fantastic resource to help highlight issues and suggest ways forward.  However, you take responsibility for what you do with it.  Your trades are yours.  What you get is 'just' input.

Write it down.  It's a great practice to see your screw-ups in writing.  It is also a great practice to see where things worked out and become a reasonably permanent part of your approach.

Forgive yourself a bit.  This is bloody hard despite seeming easy as might be portrayed from time to time.  If you are seriously good, you'll still make bad calls at least 40% of the time.

I'll tell you point blank that the best investors are far from the smartest.  However, they are the ones who can figure things out from experience and prior knowledge/contacts faster than the rest.  Some people call it 'street smart'.  Get dirty. Get prepared to take some massive hits.  Get up. Keep moving forward. This is what makes investment/trading so fantastic.


3. Neither can I.


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## burglar (4 October 2014)

DeepState said:


> ... 3. Neither can I.




1.) Is it good to have a "Mission Statement"?
i.e. I want to beat the index!

2.) Does it help to have a "Narrative"?
i.e. The China Commodity Boom.


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## Smurf1976 (4 October 2014)

DeepState said:


> Some of the proponents espouse the 10 thousand hours concept.  It takes 10 k hours to become a really solid expert in any field (chess, violin, law..) and pretty much anyone can do it.  I don't believe that.  I think we all have different gifts which make us unique and our gifts may not be suitable for every endeavor.




I am very sure that I could become an expert on the subject of football. Not necessarily at playing it myself, that requires physical ability not just intellectual, but an expert on the subject itself. I'm sure it's within my ability to learn all the rules in detail, memorise the names of players on every team, who won each of the past 20 grand finals and so on. 

I have never had even the slightest interest in the game however. It bores me beyond belief.

I am therefore almost certain to fail any attempt at becoming an expert on the subject, for the simple reason that I have absolutely no interest in it.

Same concept applies to everything I think. I've always had an interest in all things electrical, mechanical or financial and was that way from a young age. A strange combination perhaps, but that's me. So I've never found it even slightly onerous to put the time into learning about such things.


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## nulla nulla (4 October 2014)

Smurf1976 said:


> I am very sure that I could become an expert on the subject of football...I'm sure it's within my ability to learn all the rules in detail, memorise the names of players on every team, who won each of the past 20 grand finals and so on.
> 
> I have never had even the slightest interest in the game however. It bores me beyond belief.
> 
> I am therefore almost certain to fail any attempt at becoming an expert on the subject, for the simple reason that I have absolutely no interest in it....




Alternatively your lack of interest (and emotional involvement) combined with your learned knowledge could make you more objective and more able to see outcomes where the emotionally fanatic supporters fail.


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## skyQuake (5 October 2014)

DeepState said:


> *Question(s):* Efficient learning is really tough in this type of environment.  Logically prepared strategies with strong backtest fail with alarming regularity.  Stuff you think is worn out suddenly springs back to life without warning.




Not speaking for SKC's pair trading bit I think I can have a go at this one:

If something is sufficiently logical and sound, has performed well in backtesting and forwardtesting then it shouldn't fail too hard or too fast. Sure it gets crowded but if you trade it day in day out you can see it happening and eventually there is no alpha left (as with all good strategies). 
Specifically, I try to look for strategies that are unconventional and/or difficult to backtest, which should lead to a longer lifespan (still forward testing that idea!) 



> How do you cope with such high uncertainty when seeking to learn?




IMO, if significant time and effort has been spent working out why x did y, but its still unclear (step 3), then move on.
Look for easier prey, but keep an eye on the anomaly for future reference.



> What is your standard of proof required to change?




Diminished returns from the strategy if you're highish frequency. If mid/long term hold... Well I got nothing



> How do you monitor efficacy of your approach to learning?




Haven't seriously considered the _efficacy_ of my approach to learning. But generally, I know that if im managing a trade, im not exactly learning or doing research.

Here is an interesting grahpic on not forgetting what has already been learned!


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## peter2 (5 October 2014)

Great questions DeepState and they made me review my circumstances. Thinking about these topics help me realise what I've learned and the experience I've gained. 

1. Coping with uncertainty:
IMO all who fail to earn consistent profit fail to cope with the uncertainty inherent in the market. Overcoming the beginners cycle is the biggest obstacle for all new traders. 

In my case I chose one trading approach (one break-out pattern) and traded that exclusively. I took advice from Mark Douglas and thought of each trade as only one of a batch of twenty. Knowing my worse case loss and being comfortable with it lessened my emotional response after each trade and helped me focus on the trading process. Once a batch was complete I reviewed each trade and saw what I did well and my mistakes. I learned over time and many trades what I had to do to create an edge. Of course has soon as I become competent with the break-out methodology the markets changed (GFC) and opportunities were few. It was time to learn another approach and the obvious one was a reversal strategy as the bear market wasn't going to last forever. The confidence and experienced earned in mastering the break-out strategy made mastering the new reversal strategy much easier. The markets changed again and the ASX went sideways for what seemed like ages. My usual profits became a growing accumulation of small losses and I had to do something different. I learned how to trade pullbacks and I did that through the forex markets. 

2. World view: My current world view is like a 200d MA. It captures the main trend and will change when the markets turn. Experience has helped me ignore most issues raised by the media and I accept that the media drives sentiment that drives prices both up and down in the short term. 

3. Changes: I seem to be trading much shorter time frames, days instead of weeks and much more leveraged instruments (less margin in accounts). I'm trading more intraday than ever before. 

4. Proof required to change: Reviewing my application of my trading plans helps me monitor my performance and shows me the aspects to improve, change or eliminate. The performance of the basic strategies shows me what's working and what's not in the current market conditions. I attempt to match the trading strategy to the market type.

5. Efficacy of your approach to learning: Based on progress towards goals.


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## DeepState (5 October 2014)

skyQuake said:


> IMO, if significant time and effort has been spent working out why x did y, but its still unclear (step 3), then move on.
> Look for easier prey, but keep an eye on the anomaly for future reference.




IMO you are right on the money.  Suggestion: Check out Arrowstreet Capital.  They have a Sydney rep office.  Could be worth the investment of a coffee to say "Hi" from one sharp investor to another.  Probably get a nugget or two.


For clarity, I have no interests whatsoever in Arrowstreet Capital or its products.


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## Trembling Hand (6 October 2014)

DeepState said:


> 1. Observe and study the market
> 2. Develop hypothesis to explain behaviour observed
> 3. Acquire new knowledge and data to check and test hypothesis
> 4. If hypothesis is valid, try to develop trading strategies around it
> ...




From my view the reason people have so much trouble is they fail to fulling embrace the correct steps to lead to understanding then haven't got a hope in hell of doing the hard repetitive work of practise and review that is required to actually develop expertise. If your hypothesis are incorrect but have formed your belief system you will have an extremely hard time practising something that is always going to fail. Yet at the same time if this is part of your fundamental belief system you will probably never be able to give up on the idea. End result is stuck in a process that doesn't work yet too hard to give up on. 



DeepState said:


> However you have come upon this loop, it is exactly that related to expertise development and is very seriously undertaken by the most elite in any endeavor where skill and effort are related to outcome.  Guys like you.
> 
> I read this and was totally rapt. It is rare. If you respond, thanks.
> 
> ...




For example the two bits I have underlined of yours are in direct opposition to my own believes. As a result I have been able to find 'something' in what you call "pretty noisy stuff" and repeatedly practise and review that practise to learn and grow skills. As the world lines up with my view it makes a self-fulfilling feedback loop to catch interest which then feedbacks into enthusiasm which feeds more practise and review and on and on.


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## DeepState (6 October 2014)

Trembling Hand said:


> 1. From my view the reason people have so much trouble is they fail to fulling embrace the correct steps to lead to understanding then haven't got a hope in hell of doing the hard repetitive work of practise and review that is required to actually develop expertise. If your hypothesis are incorrect but have formed your belief system you will have an extremely hard time practising something that is always going to fail. Yet at the same time if this is part of your fundamental belief system you will probably never be able to give up on the idea. End result is stuck in a process that doesn't work yet too hard to give up on.
> 
> 
> 
> 2. For example the two bits I have underlined of yours are in direct opposition to my own believes. As a result I have been able to find 'something' in what you call "pretty noisy stuff" and repeatedly practise and review that practise to learn and grow skills. As the world lines up with my view it makes a self-fulfilling feedback loop to catch interest which then feedbacks into enthusiasm which feeds more practise and review and on and on.




Thanks TH.

1. Might another phrase be "hold your beliefs lightly"? Also, be "data-driven"?

2. My query there is not meant to imply this is impossible.  Finding something from near static is what I do as well. We seek to find something useful in the midst of a very large amount of noise. I guess the major question for you given the thread content now is: 

a. how do you prefer to go about finding the signal within the noise in the first place? 
b. is it more important to you to find a few good ideas and develop them, or find a large number of working hypotheses and continue to trim them (as others are added)?


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## tech/a (6 October 2014)

I may be a little different.

I believe there will always e someone smarter than I am----if I need those smarts I'll hire them.
I know I cant know everything
I know I don't need to.
*We all rise to our level of incompetence*

As for trading.
I'm visual hence technical analysis fits for me.
Just as you have an inbuilt sense with people so you
Can and should have with anything your directly involved with.
If your in a relationship you know if it's strong and healthy or not.
You know if you or your kids and your friends are ok.

For e same with trading
T/H put it best with it's like recognizing your mother in a crowd.
*It really is *

As for noise.
Nothing moves without noise. You need noise to sort out direction.
The trick is to e able to understand what it is that the noise is 
Sorting out.-----observe it long enough and you'll see it.

One persons noise is another's road map.


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## KnowThePast (6 October 2014)

I have an opinion too!

In addition to sorting out all the noise, how do you judge success, or the validity of the hypothesis? Just because one made money 3 years in a row does not mean he/she was right, perhaps just lucky. Statistically, it takes a very large number of overperforming years before you can confidently attribute result to skill, rather than luck.

And so, you start with hard data and economic theories that provide a plausible explanation of how something works. You verify that it is still plausible it may work today. And you take the plunge, knowing that the past is not an indication of the future. 

How do you improve on something when you are now even sure that your base is correct? I don't know. But I think you still go through the learning loop and keep exploring new things. A holy grain will not be found, everything you discover will have only some degree of confidence to it. A combination of various concepts, however, often provides a framework for understanding the whole picture better. And so it comes back to experience. Experience and curiosity, as experience of doing the same thing over and over again is not terribly helpful (unless it works).

There's no gradual slope to learning anything. You may sometimes have no improvement for months, and then have a lightbulb moment and everything falls into place in one afternoon. But you still need to spend those months.


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## Trembling Hand (6 October 2014)

KnowThePast said:


> In addition to sorting out all the noise, how do you judge success, or the validity of the hypothesis? Just because one made money 3 years in a row does not mean he/she was right, perhaps just lucky. Statistically, it takes a very large number of overperforming years before you can confidently attribute result to skill, rather than luck.




Gee I would disagree. How do you come up with the idea that 3 years is not proof but could be luck. I doubt for a start if you are discretionary you would actually be trading the same after 3 years. Rarely does a market stay that static. But if we are talking short term trading that is literally 1000s of trades. If you equity curve is smoothly moving in the right direction that is proof.


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## KnowThePast (6 October 2014)

Trembling Hand said:


> Gee I would disagree. How do you come up with the idea that 3 years is not proof but could be luck. I doubt for a start if you are discretionary you would actually be trading the same after 3 years. Rarely does a market stay that static. But if we are talking short term trading that is literally 1000s of trades. If you equity curve is smoothly moving in the right direction that is proof.




Hi TH,

I am referring to this:




And therein lies the difficulty - how/when do you change approaches, knowing that it takes years to be certain that any one approach is right.

With short term trades, you are right, it's more data and should be easier to draw conclusions from. But to counter that - thousands of trades in a market that is moving up over 3 years may produce a very different result in a falling market. So you still need years of data.


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## Trembling Hand (6 October 2014)

KnowThePast said:


> Hi TH,
> 
> I am referring to this:
> 
> ...




I reckon you could tell statistically in quite a short time with most short term trading. Remember this is not about beating a trending market or hanging around for a long term trend. You have to basically be flat at very regular intervals ie end of each day or every few days. There is no way to be getting a ride from a trending market because trends happen in overnight gaps not in buying the open and selling at the close. A long term trader/investor is judged on their decisions only a few times a year, luck can easily play a role. Short termers are judged many times a day every day.


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## KnowThePast (6 October 2014)

Trembling Hand said:


> I reckon you could tell statistically in quite a short time with most short term trading. Remember this is not about beating a trending market or hanging around for a long term trend. You have to basically be flat at very regular intervals ie end of each day or every few days. There is no way to be getting a ride from a trending market because trends happen in overnight gaps not in buying the open and selling at the close. A long term trader/investor is judged on their decisions only a few times a year, luck can easily play a role. Short termers are judged many times a day every day.




Good points, TH. You are probably right with shorter term trading.


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## skc (6 October 2014)

DeepState said:


> However you have come upon this loop, it is exactly that related to expertise development and is very seriously undertaken by the most elite in any endeavor where skill and effort are related to outcome.  Guys like you.




I read your post and have been thinking about a respond for the past few days. It is a difficult topic and I don't pretend to be an expert in the field of becoming an expert. The "loop" that I've come up with is simply how I saw my own development, although day-to-day I don't sit there and analyse whether I am doing Step 1 or Step 2 consciously. 

I also don't know if I'd classify myself as elite or expert trader. I think I am beating the general crowd, but I am far from knowing everything about every situation. I am like your local university's Physics Professor, rather than Steve Hawkins. And in turn, Steve Hawkins probably barely knows anything compared to the vast body of knowledge within the entire universe. 

I wil attempt to respond to your questions, but I apologise in advance that it will float randomly between general 50,000 feet views and nitty-gritty detailed specifics.



DeepState said:


> My first question related to high and low uncertainty environments and the application of expertise loops.  Something like chess has no uncertainty.  All the rules are known and never change.  Then you get into financial markets where many things don't make sense for long periods of time.  Feedback loops are long and mashed up with other factors whose interaction is weird and often never seen before, or only slightly similar.  Worse, as soon as someone cracks the market, they get cracked as the markets figure out how they are doing it and replicate it.  That's high uncertainty.  You have a hard time figuring out probabilities at all and outcomes are often a...crap shoot.




Yes market is highly uncertain.. but the ultimate objective of trading (and investing) is not truth-seeking. It's just making profits. So you just need to be right some of the time, make as much as possible while you are right and manage the risk while you are wrong. It's starting to sound like some generic technical trading strategy, but any looped learning should focus on improving these three things. 



DeepState said:


> You work in trading with pretty short horizons.  My understanding is that this is pretty noisy stuff but your report a month or so ago of your second year in Propex (?) suggests that you are achieving high hit rate and risk managing very well.  Even your trade frequency (which isn't massive for a trader) basically backsolves for very nice average return if you are betting symmetrically without elevating exposure into losses as a pairs guy.  If you are martingale, then I'd come to a slightly different conclusion, but still positive of course given the record you have posted and the limited market directionality.
> 
> In my world, that's an amazing outcome.  We don't trade with anything like that kind of frequency but we didn't enjoy the liquidity advantage (at the time...hehe).




No I am not martingale and I doubt any prop shop would be in business for long letting someone trade martingale with their capital. The result I posted was a combination of a pairs strategy and outright intraday trades. The outright trades were ~20-25% of the total P&L and does help to smooth the equity curve even further. And my size, while large relative to a private trader, is still tiny tiny in the whole scheme of things.



DeepState said:


> *Question(s):* Efficient learning is really tough in this type of environment.  Logically prepared strategies with strong backtest fail with alarming regularity.  Stuff you think is worn out suddenly springs back to life without warning.
> 
> How do you cope with such high uncertainty when seeking to learn?
> 
> ...




I'd describe my trading as evlolutionary... continuous learning and adjustments on the fly. I am always doing something different from what I was doing before. 

For example, I used to pair up the iron ore miners, but I've pretty much stopped pairing them since early 2014. So how did I "learn" about this changing market and "improve" my trading by avoiding the sector?  

1). I made observations that company share price correlations have broken down along with the iron ore spot price falling
2). I developed hypothesis that, with lower spot price, the margins are getting smaller and fluctuates more in percentage terms. Different producers are affected differently so share price correlations in the past should no longer be relied upon
3). I investigated the facts... it was handy that plenty of reserach analysts cover iron ore producers and their costs. It was clear some companies are still enjoying profits while some will struggle to survive.
4). I made the adjustments to stop trading them.

But as I said, all these were simply happening as I watch the market everyday. It's only when I have to put it in writing that I spend time analysing what I actually did. I didn't wait for my system to generate a string of losing signals before I stopped trading these pairs, as a slightly lazier and more stubborn pairs trader might have done. 

And this is just one exmaple on one factor influcing one sector. I would go through the exact same loop when other things change... like gold, or rising $USD, or pending regulation changes, or overall market volatility changes etc. I am definitely not attempting to optimise my trading by finding the absolute truth or valuation or anything like that, I am just trying to continuously improve my win rate and reduce my losses by observing widely, applying some logic and verifying with facts.



DeepState said:


> What is your standard of proof required to change?




Pretty low. These days I will change when it "feels" right to do so. I don't think you can have a hard set of rules (like X failed trades in a row) because chances are they'd be too slow for both switching off and switching things back on. 

However, the iron ore example is a simple one and it happens cyclically and there are plenty of parallels to learn from. If a new unknown situation arises and affects things more subtly, then I'd probably get hit few times before I react to what hit me (if I ever do).



DeepState said:


> How do you monitor efficacy of your approach to learning?




Not really in a structural manner. I guess I do ask myself... do I feel mostly in control, or do I feel something is broken. If I am in control, then I am learning/adjusting just adequately to keep on surviving. If I feel out of control and I don't know why, then I may be missing something. And the practical way is simply reduce the size and wait for it to pass. It's like driving to a brand new place... you slow down until you become familiar with the place, or until you get out of the foreign place and re-enter a familiar place.


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## Trembling Hand (6 October 2014)

Skc what you have listed above is what I was, probably unsuccessful, in getting at in bonkers "TA which pattern to trade" thread. 

If you want to trade short term, imo, there is no "pattern" to learn. There is something far more dynamic going on because you are dealing with an uncertain market that has constant change in not just direction/trend but volatility, time, speed, volume and even where the action is.

Do you feel like what you are doing once you take a look at the progress over the years is actually quite different every say 6-12 months? But at the same time the process that leads to the change is actually the same?


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## ThingyMajiggy (7 October 2014)

Trembling Hand said:


> Skc what you have listed above is what I was, probably unsuccessful, in getting at in bonkers "TA which pattern to trade" thread.
> 
> If you want to trade short term, imo, there is no "pattern" to learn. There is something far more dynamic going on because you are dealing with an uncertain market that has constant change in not just direction/trend but volatility, time, speed, volume and even where the action is.
> 
> Do you feel like what you are doing once you take a look at the progress over the years is actually quite different every say 6-12 months? But at the same time the process that leads to the change is actually the same?




Can you guys explain more on the dynamic thing? Not any "pattern" to learn etc. What do you mean by that? What are we supposed to be looking for/doing? How can you be consistent if it's ever changing, do you mean keeping track of avg volatility/volume, how fast it moves on a continuing basis or? 

Some great posts here


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## avion (7 October 2014)

Great thread! I found the inspiration for my signature...:thankyou:


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## Trembling Hand (7 October 2014)

ThingyMajiggy said:


> Can you guys explain more on the dynamic thing? Not any "pattern" to learn etc. What do you mean by that? What are we supposed to be looking for/doing? How can you be consistent if it's ever changing, do you mean keeping track of avg volatility/volume, how fast it moves on a continuing basis or?
> 
> Some great posts here




My low intellect I fink is making it hard to get across what I'm trying to say.:freak3: So I'll let someone with actual qualifications and experience explain it with like real science stuff,



> Improving Trading Performance by Building Fluid Intelligence
> An important distinction emphasized by cognitive psychologists is crystallized vs. fluid intelligence.  Crystallized intelligence represents what we know, our storehouse of knowledge.  Fluid intelligence represents our "how to" ability:  our capacity for reasoning and dealing with new and unfamiliar problems.  Interestingly, what improves crystallized intelligence does not necessarily improve fluid intelligence and may even interfere with our fluid capacities.  Our ability to solve problems in unique and unfamiliar areas is not advanced by having accumulated more information, but creative activities--such as performance in the arts--may build our ability to handle new situations creatively.  Physical activity also appears to be linked to improvements in aspects of fluid intelligence.
> 
> *Discretionary trading is a great example of an activity that requires fluid intelligence.*  We can read and memorize information about markets until we have an encyclopedic database,* but that does not cultivate the skill to reason and function in uncertain and rapidly changing markets. * Pattern recognition is an important aspect of fluid intelligence:  the ability to understand new situations based upon patterns experienced in similar situations.



 My bolds.

A follow up post from the above,


> How Can We Make Ourselves More Intelligent?
> The recent post suggested that trading ability may be more linked to intelligence than is ordinarily acknowledged.  That is because intelligence embraces both crystallized knowledge (what one knows) and fluid abilities (what one can do with what one knows).  It is the latter, fluid abilities--not the crystallized information that tends to be tapped by achievement tests--that are most like trading, where reasoning in fast-moving situations is critical.
> 
> There are two big implications of this research.  *First, it may well be that the right kind of deliberate practice in simulation mode not only teaches trading patterns and skills, but acts as a fluid intelligence booster.*  By requiring traders to reason quickly in moving markets and providing them with immediate feedback regarding their decisions, simulated trading could be good brain training.  Game playing could be great training for trading.
> ...



 My bolds. Sorry about the red highlights but really please!!!  That is it in a nutshell. It won't matter how many thousand static charts you know if you haven't got the skill to process unusual and fast moving information as it unfolds. My words were "If you want to trade short term, imo, there is no "pattern" to learn. There is something far more dynamic going on ", apparently thats called Fluid intelligence.


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## CanOz (7 October 2014)

I'm think I'm getting this now and I can relate to it. I can't recall when exactly it happened but it was more sudden than a long transition. It seemed like a matter of a couple of weeks between when I was trading what I thought could happen based on previous day's levels, channels etc., to what I could feel was happening in front of my eyes. An example is after a big sell off where I used to get killed fading the initial impulse move, later I had the patience to wait until I recognised the short covering along with new shorts that would later get squeezed out...this leaves a pattern behind which I called the 'hockey stick'. The pattern needs to be recognised as its forming to be very useful...the pattern is not just a shape but a collection of transactions that represent a certain behaviour by a percentage of the market participants...you need to recognise what's happening and who it's happening to to profit from it...in Real time.

This was the biggest ahhh ha moment for me after risk/reward.

CanOz


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## McLovin (7 October 2014)

CanOz said:


> I'm think I'm getting this now and I can relate to it. I can't recall when exactly it happened but it was more sudden than a long transition. It seemed like a matter of a couple of weeks between when I was trading what I thought could happen based on previous day's levels, channels etc., to what I could feel was happening in front of my eyes.




Doesn't knowledge come in spurts and then plateau for long periods followed by another spurt? That's how it works for me anyway. I have a big break through where everything is sharp and clear and that leads to new questions which build on the previous knowledge (hopefully!) with a lot of cognitive dissonance in between.

Self doubt is also an incredibly useful force.


----------



## CanOz (7 October 2014)

Yeah, I would agree with that for me as well McLovin. I spend some time in the DZ OR DISCOMFORT ZONE before moving onto the CZ OR COMFORT ZONE where I can use the new knowledge but learn little new knowledge and then once again moving into the DZ and learning again...sprinkled with a few moments in the PZ


----------



## skc (7 October 2014)

Trembling Hand said:


> Skc what you have listed above is what I was, probably unsuccessful, in getting at in bonkers "TA which pattern to trade" thread.
> 
> If you want to trade short term, imo, there is no "pattern" to learn. There is something far more dynamic going on because you are dealing with an uncertain market that has constant change in not just direction/trend but volatility, time, speed, volume and even where the action is.
> 
> Do you feel like what you are doing once you take a look at the progress over the years is actually quite different every say 6-12 months? But at the same time the process that leads to the change is actually the same?




Yes. And I think that's basically the problem to most books and training. They are not dynamic enough. It's like a book of set plays in basketball - it is useful and uselss at the same time with respect to making me a good basketball coach.



Trembling Hand said:


> apparently thats called Fluid intelligence.




Very apt terminology.



McLovin said:


> Doesn't knowledge come in spurts and then plateau for long periods followed by another spurt? That's how it works for me anyway. I have a big break through where everything is sharp and clear and that leads to new questions which build on the previous knowledge (hopefully!) with a lot of cognitive dissonance in between.
> 
> Self doubt is also an incredibly useful force.




As far as fluid intelligence is concerned, I think it's more continuous. Like driving in a new area... you are constantly looking, steeling, adjusting the accelorator and brakes etc. The "spurts and plateau" would be more akin to studying a new map area before going on a trip. It is a somewhat different process imo.


----------



## So_Cynical (7 October 2014)

The simple fact is that HFT companys spend 10's of millions even 100's of millions to position servers and write algorithms to get the tiniest of an advantage over the other HFT companys...they do this to get a clear measurable (speed) edge.

So if it was possible to obtain a consistent measurable edge by using patterns or anything else that could take advantage of the masses of data that is available, then i imagine someone would of spent x millions and done it...but of course no one has.

One could argue that no one has done it because the data is useless, making any study of data equally as useless.


----------



## McLovin (7 October 2014)

skc said:


> As far as fluid intelligence is concerned, I think it's more continuous. Like driving in a new area... you are constantly looking, steeling, adjusting the accelorator and brakes etc. The "spurts and plateau" would be more akin to studying a new map area before going on a trip. It is a somewhat different process imo.




Yeah, I think you're right. I can see the distinction.


----------



## CanOz (7 October 2014)

So_Cynical said:


> The simple fact is that HFT companys spend 10's of millions even 100's of millions to position servers and write algorithms to get the tiniest of an advantage over the other HFT companys...they do this to get a clear measurable (speed) edge.
> 
> So if it was possible to obtain a consistent measurable edge by using patterns or anything else that could take advantage of the masses of data that is available, then i imagine someone would of spent x millions and done it...but of course no one has.
> 
> One could argue that no one has done it because the data is useless, making any study of data equally as useless.




I fail to See the connection here SC


----------



## lesm (7 October 2014)

CanOz said:


> I'm think I'm getting this now and I can relate to it. I can't recall when exactly it happened but it was more sudden than a long transition. It seemed like a matter of a couple of weeks between when I was trading what I thought could happen based on previous day's levels, channels etc., to what I could feel was happening in front of my eyes. An example is after a big sell off where I used to get killed fading the initial impulse move, later I had the patience to wait until I recognised the short covering along with new shorts that would later get squeezed out...this leaves a pattern behind which I called the 'hockey stick'. The pattern needs to be recognised as its forming to be very useful...the pattern is not just a shape but a collection of transactions that represent a certain behaviour by a percentage of the market participants...you need to recognise what's happening and who it's happening to to profit from it...in Real time.
> 
> This was the biggest ahhh ha moment for me after risk/reward.
> 
> CanOz




Dance with the market. Learn that and you will have another ahhh ha moment.

You have now discovered why lagging patterns are what they are and you need to see them starting to form rather than waiting for them to form. Much too late in a dynamic environment, even worse in a fast moving situation.


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## DeepState (7 October 2014)

McLovin said:


> Yeah, I think you're right. I can see the distinction.




I see it this way.  In order to acquire useful, breakthrough, knowledge and ability, you need to acquire a disparate range of things and put it together before something meaningfully new and better is actually created to add to your existing skillset.  Up until the last useful piece is added, not much goes on.  Learning to ride a bike requires a bunch of things to work.  It isn't until the last bit happens/clicks that you manage to ride off without scraping your knees by the third pedal.  Up until then, you aren't really riding.  It is a breakthough because several component skills came together and combined to produce something special. Plateaus and spurts. Generally, the more bits that need to combine, the longer the plateau.  So it is with learning something useful or learning a complex skill.  These things do not move in straight lines, although it might be argued that, once somewhat mastered, further skill acquisition is more proportionate to outcome than some big "Ah-huh" moment.

Fluid intel is like situational awareness.  Some people just see things and relationships much more quickly.  There are many ways that high performers do this and I think the research points to the skills not being transferable across domains.  You can be a genius in a fighter jet whizzing all over the place and have no idea whatsoever about Kasperov's deep strategy.  Both require a lot of fluid intel.

Crystal is about having a library to hand.  It's value degrades by the number of books on loan and not returned.


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## ThingyMajiggy (7 October 2014)

So basically we're talking about having the feel for the market based on experience and being able to quickly adapt and make decisions based on what you've seen before, and that pretty much practice makes perfect?  

So I'll keep watching market replays on 10x speed then, sounds like the way forward, get my mind used to and trained in what to see, like speed reading, get with the flow. 

That's really all it is? Just a certain set of skills that differentiates the big boys from the failures. Seems too simple to be true.


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## CanOz (7 October 2014)

lesm said:


> Dance with the market. Learn that and you will have another ahhh ha moment.
> 
> You have now discovered why lagging patterns are what they are and you need to see them starting to form rather than waiting for them to form. Much too late in a dynamic environment, even worse in a fast moving situation.




That's the great thing about the DOM, it only lags as much as your latency!


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## So_Cynical (7 October 2014)

CanOz said:


> I fail to See the connection here SC




Connection is that if data/patterns were a predictor of anything an algorithm could be written to take advantage of that...since no such algorithm exists we can assume with great confidence that there is nothing to be learned from data/patterns.


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## Trembling Hand (7 October 2014)

So_Cynical said:


> Connection is that if data/patterns were a predictor of anything an algorithm could be written to take advantage of that...since no such algorithm exists we can assume with great confidence that there is nothing to be learned from data/patterns.




 You cannot be serious? 



> For more than twenty years, Simons' Renaissance Technologies hedge fund, which trades in markets around the world, has employed complex mathematical models to analyze and execute trades, many of them automated. Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions.[7] Some also attribute Renaissance performance to employing Financial signal processing techniques such as pattern recognition.
> 
> Renaissance employs staff with non-financial backgrounds, including mathematicians, physicists, astrophysicists and statisticians. About a third of the 275 employees at the East Setauket office have Ph.Ds. http://en.wikipedia.org/wiki/Renaissance_Technologies






> James Harris "Jim" Simons (born 1938) is an American mathematician, hedge fund manager, and philanthropist. Considering his background as a code breaker and an expert in pattern recognition[4] some also consider him as one of the pioneers of financial signal processing.
> 
> Simons taught mathematics at Stony Brook University on Long Island in New York.
> 
> ...


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## CanOz (7 October 2014)

So_Cynical said:


> Connection is that if data/patterns were a predictor of anything an algorithm could be written to take advantage of that...since no such algorithm exists we can assume with great confidence that there is nothing to be learned from data/patterns.




Oh no, here we go again...


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## DeepState (7 October 2014)

ThingyMajiggy said:


> 1. So basically we're talking about having the feel for the market based on experience and being able to quickly adapt and make decisions based on what you've seen before, and that pretty much practice makes perfect?
> 
> So I'll keep watching market replays on 10x speed then, sounds like the way forward, get my mind used to and trained in what to see, like speed reading, get with the flow.
> 
> 2. That's really all it is? Just a certain set of skills that differentiates the big boys from the failures. Seems too simple to be true.




1. There is no concept of sustained perfection in this business.  There really are just a set of ever-changing perfects.  Dynamic markets.  [If interested, refer to Andrew Lo "Adaptive Markets Hypothesis" for a pretty realistic idea of what actually goes on].  So the game is partially about practicing to become perfect in whatever happens to be working at this time.

However, there is a very large advantage to those who can rapidly identify what will work and skill up or build infrastructure to capture it.  Whilst practice does make perfect, learning bloody fast about the implications of change makes you rich (or however you want to define success) in the endeavor of choice.  It turns out that the difference in abilities in financial markets has very large consequences.  It is somewhat less in dentistry.

I could read a book at 10k words per minute.  My comprehension would pretty much be zero.  There is more to it than speed, although it is clearly a  feature.  This concept of fluid intel is a sense of just knowing what to do in a situation.  Some call it intuition, some call it guided experience, some call it street-smarts.  As I mentioned before, this ability seems situationally dependent. I could practice all day long, watch match replays at 10x speed for years, and I can tell you my chances of making the Wallaby tour are essentially indistinguishable from a hole in the ground.  The same could not be said in other fields.


2. Those skills are broadly defined.  Many combinations of skills are successful.  Some include knowing the kinds of people that help you figure out what's going on.  No-one says you have to acquire it yourself. There are other similar concepts. There just happen to be a whole lot more that are not successful. 

Then there is environment.  An awesome investor in one period can look like an ass in another.  Sometimes the skills do not align with the environment.  We can go into organizational behavior and other societal matters if you wish.

So it is not as simple as that.  But your chances of success are definitely enhanced if you can recognize things a little bit faster or more accurately and capitalize on it.  You don't need to be good, only better. We live at the margins here.


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## DeepState (7 October 2014)

Trembling Hand said:


> You cannot be serious?




Simons is scraping and parsing our conversation right now, classifying it and embedding it in predictive regressions via kernel learning algo.  Very formidable.  And that stuff is old. All algos are certainly not created equal...and neither are discretionary traders/investors.  You know that - partly because you actually are serious.


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## Weatsop (10 October 2014)

Do you like trading? If no, stop trading. You're done.

If yes, then it's no big ask to practice stuff. Stopped out for today? Or the market is bad for how you trade? Hopped on early? JUST STARTING? Then hurray, fire up the paper account and practice something, or pop open historical data and go candle-by-candle.

*Practice one thing.* For the love of god, practice one thing and ONLY one thing, and know what that one thing is. (Seriously - what's the thing? Write it down!) Maybe one kind of entry, with one kind of exit. Sure, when you trade live you've got a bunch of tools and tricks, and use them all. But when you intentionally practice, have ONE thing to focus on. Otherwise, how can you clearly see whether it was working, or whether you're getting better, or if you are PROFITABLE, when it's all mixed up in a bunch of maybes?

Be honest with yourself. Don't cheat. Log the trades, the losses and wins and the commissions and slip. Don't just eyeball old data and tell yourself you'd have made a motza. That's not practice. That might be ok to get some basic ideas, but reality doesn't work like that.

Note when it's going good. Print the charts. Stick 'em on your wall, mark the trades. DO THE SAME WHEN IT'S BAD. Notice anything different? Is the price action looking different? Is there some way to avoid those bad trades, but keep the good ones? Can you see the jaggy stupid wandering crud that tells you to stay the hell out of the market? Can you recognise that? Practice NOT trading that stuff, because seriously, staying out of bad conditions is something you need to do.

And that noting what's good and bad? Do it with the real trades! *Real trades are the best practice*, but it's messy. It's not just one thing you're practicing, so especially at the time you made the trades, you'll miss some of the details - you'll miss the forest for the trees. So on the next day, get on your computer a couple of hours early. Look over yesterday's trades. What was good? What was bad? Mark all the trades, and what you were thinking when you did them. Does REASON X keep failing? Does EXIT Y keep missing something obvious?

Don't - this is important - don't try to get all the pips. If you could, you'd be the richest person on the earth. You won't get them all. Don't kick yourself for "mistakes" that are only clear in hindsight. Practice, instead, being PROFITABLE, not being RIGHT. Can you introduce a new "rule", under some conditions, that would have made your old trades better? Fine, try that rule - and practice ONLY that rule for a while. See if it works when the bars are moving.

If all of that isn't fun, then quit. There are plenty of jobs on earth. Go do one you like.

There's no perfect trade. Ever. That's what makes this fun. Because there is ALWAYS something to do.


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## So_Cynical (10 October 2014)

Trembling Hand said:


> You cannot be serious?






			
				TH said:
			
		

> For more than twenty years, Simons' Renaissance Technologies hedge fund, which trades in markets around the world, has employed complex mathematical models to analyze and execute trades, many of them automated. Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions.[7] Some also attribute Renaissance performance to employing Financial signal processing techniques such as pattern recognition.




Found a WSJ piece from last year on them.



			
				http://online.wsj.com/news/articles/SB10001424127887324474004578444933337979710 said:
			
		

> Updated April 25, 2013 6:16 p.m. ET
> Renaissance Technologies LLC, a hedge-fund heavyweight, has been bruised in the market's recent turbulence.
> 
> Two of the three hedge funds that the company makes available to outside investors have suffered sizable losses this month, largely due to the big drop in the Japanese yen, investors say.
> ...




According to the above article, if Renaissance have an algorithm or 3 they clearly need some tweeking. 

As i said, the fact that no infallible or even consistently profitable algorithm exists means that the data is useless for predicting price movement = patterns are useless.


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## barney (10 October 2014)

Weatsop said:


> Do you like trading? If no, stop trading. You're done.
> 
> If yes, then it's no big ask to practice stuff. Stopped out for today? Or the market is bad for how you trade? Hopped on early? JUST STARTING? Then hurray, fire up the paper account and practice something, or pop open historical data and go candle-by-candle.
> 
> ...




Seriously good post "Weat"  ... where have you been for the last couple of years  .... are you and TH mates?:


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## ThingyMajiggy (10 October 2014)

So_Cynical said:


> Found a WSJ piece from last year on them.
> 
> 
> 
> ...




You have an interesting take on this stuff SC, how do you trade if not some form of a pattern?


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## DeepState (10 October 2014)

So_Cynical said:


> Found a WSJ piece from last year on them.
> 
> 
> 
> ...






As at 28 Sept 2007, the total AUM for RET was $35.4bn.  This largely consisted of a long biased equity fund managed against the S&P 500 called the RET Institutional Equity Fund consisting of $25.6bn.  Further, their headline fund, Medallion, had about $6bn on 1 July 2007.

Although the firm manages $6bn for outsiders as at 25 April 2013 vs $25bn in 2007, this occurred largely because holders of RET IEF sold as the market deteriorated in 2008 and 2009.  Unlike the name of the fund, the holders were largely private wealth and intermediated platforms.  Hot money.  The RET IEF managed $7.3bn at 2013. The difference accounts for virtually all of the external client exposure movement.  RET managed a total of $23bn. 

Thus, about $18bn of AUM loss was due to hot money movement at the bottom of the equity market.  This implies growth occurred to partly offset this.  In 2012, RET launched the Institutional Diversified Alpha strategy.  It held $5.5bn as at 2013.  It is a cut down version of Medallion.  Hence, investors showed confidence in the firm's strategies and abilities as a pure alpha generator in diversified stock selection (in largely US stocks, the same universe as per RET IEF) when broad market movements were taken out of the equation.  Fees for this would make up for a substantial part of the loss from RET IEF given it is non-directional.

Medallion, which is only open to employees now holds $10bn.  Before this fund closed, demand for it was so high that fees of 5% base and 44% of performance were levied.  That is an incredible load relative to the industry standard of 2% and 20%.  Again, demonstrating the confidence in RET and desire to hold assets along side their staff even if basically half of the profits generated would revert to the staff despite bearing no downside risk.

Were the algorithms so useless?  The article supplied says as follows:

"Medallion has scored average annual returns of about 35%, after fees, since its inception in 1988, with only one money-losing quarter since 1995, a slight 0.5% drop in the first quarter of 1999, the firm has told investors"

Furthermore:

"Renaissance's best-known fund, the $10 billion Medallion fund, is up around 10% so far this year"

"Medallion, which rose more than 20% last year, is only open to Renaissance employees"

If the requirement is infallibility, I guess this record is junk.  A more rational examination would suggest that RET has some predictive ability in the application of their technologies.   If algo is to be judged on robustness though hundreds of iterations of market evolution and, if failure to remain consistently profitable or infallible for a period of 26 years somehow implies the data is useless, there might be a lack of understanding here about how algo is actually developed and used.  Sure works for some.  If something is useless, it certainly isn't the data.


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## So_Cynical (11 October 2014)

DeepState said:


> if failure to remain consistently profitable or infallible for a period of 26 years somehow implies the data is useless, there might be a lack of understanding here about how algo is actually developed and used.  Sure works for some.  If something is useless, it certainly isn't the data.




Put simply, if Renaissance or any one else has an algo that worked consistently, they would use it and be profitable every year...Renaissance according to the first thing that popped up in a google search, operates some funds that are NOT consistently profitable.

Therefore i conclude (and struggle to see it any other way) that Renaissance does NOT have a consistently profitable algo.

http://www.institutionalinvestorsal...ssance-Technologies-Falling-off-the-Mark.html
~


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## skyQuake (11 October 2014)

So_Cynical said:


> Put simply, if Renaissance or any one else has an algo that worked consistently, they would use it and be profitable every year...Renaissance according to the first thing that popped up in a google search, operates some funds that are NOT consistently profitable.
> 
> Therefore i conclude (and struggle to see it any other way) that Renaissance does NOT have a consistently profitable algo.
> 
> ...




perfect strawman argument?

I'm sure the medallion fund's algos are still humming along nicely


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## DeepState (11 October 2014)

So_Cynical said:


> Put simply, if Renaissance or any one else has an algo that worked consistently, they would use it and be profitable every year...Renaissance according to the first thing that popped up in a google search, operates some funds that are NOT consistently profitable.
> 
> Therefore i conclude (and struggle to see it any other way) that Renaissance does NOT have a consistently profitable algo.




Interesting conclusion.

You have clearly not checked the data on how Renaissance runs its funds.  Had you done so you would not conclude that any fund is representative of any other.  

You previously supplied a newspiece from WSJ which reported that the main fund, Medallion, has had a stellar run.  This fund uses the full suite of abilities to maximum advantage.  Only in one quarter since 1995 did it record a negative quarter.  This was a minor underperformance at that. 

If you then conclude that, because of a single quarter of underperformance, despite an incredible set of performance from that date and also since inception, that this result is inconsistent...struggle away.  

To explore this further, what is the measure of consistency?

If a strategy does not produce good returns every minute of every day or 26 years, it is not consistently profitable?

Perhaps we should relax this notion. How about not consistent for every hour of every day for 26 years.  Not consistent? Data is useless?

RET Medallion serves to represent quarterly measurement.  You have chosen to overlook that in your response , or otherwise regard that as inconsistent with useless data.

How about an annual basis?  I know this extends beyond any indicated window of consistency that you have expressed. But let's explore anyway. 

What if a portfolio consisting primarily of US equities lost value (over an annual period) in absolute terms twice and nine times vs the S&P last 49 years?  Not consistent?  I guess Warren Buffett doesn't have a good algo either and his data is useless.

Happy struggling....

Further to TM, why do you post T/A and bother to average down, yet alone participate in a market if all data is useless?  It is entirely inconsistent with this perspective without the involvement of investment alchemy.  Alternatively you are just doing it for entertainment.  Perhaps this whole position is just a form of entertainment?

Investing in the market is actually an algo whichever way you (well, you might not) look at it. It is a decision. A decision is a process, even if random. It is an algo.  Its results are clearly inconsistent.  Thus investing in equities is a bad algo and the data is useless. It is ridiculous to use it.  The rational thing is not to touch something where you have no knowledge of anything and data relating to it is useless.  Unless you are doing so for entertainment or hard wired for excessive risk taking.     

If you can't invest in equities because all data is useless and you cannot make any sense of it or generate any expectations...Then what?  Cash?  Except the purchasing value of cash sometimes loses real value!  Inconsistent.  Chuck that out too.  Bad algo.  Gold? Same deal?  Dirt?  Salt? Same deal.  ...all data is useless.  Without useful data, all decisions are entirely uninformed and essentially random.

Given the market is really people when it is truly considered (where would the market be without people? Even algo is programmed by - well - people) we must check to see if data in relation to people is useless. This is the natural extension. If people use data to make decisions, even that knowledge is useful.  However, if all data is useless, we are just random people doing random things.  When I meet someone in the street, I might say "lovely grass ice-cream to your purple catfish umbrella" - burp - and place my left shoe down their shirt.  The data I had for sentence formation and social interaction is useless.  And thus this entire text is the result of a bunch of monkeys typing, after they finished a Shakespearian novel.

Could be.  I don't have any useful data to know anything about the veracity of this.  If all data is useless, I don't even know what the concept of veracity actually is.  Maybe you are an algo housed within a cosmos which itself is entirely random. We don't actually exist.

...and now we are into the realm of reality and philosophy where it just might be that data is useless.  Interesting perspective.

....Struggle away.


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## Smurf1976 (11 October 2014)

So_Cynical said:


> Put simply, if Renaissance or any one else has an algo that worked consistently, they would use it and be profitable every year...



I can't think of ANY business situation where every single transaction makes a profit. Not one.

But if the sum total of your profits exceeds your losses, and your maximum drawdown is within an acceptable limit, well then you have a profitable business as such.

Having 100 years of rainfall data doesn't tell you that there will be a flood next March. But it certainly does tell you how likely any particular amount of rain is over any given period. With the benefit of such information, you can then manage your farm, hydro scheme, outdoor festival or planned 10 day bushwalk in a manner that has a very good probability of being satisfactory. Sometimes it will go wrong of course, but looking at past data which shows a definite pattern is a way to tilt the odds in your favour.


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## Weatsop (14 October 2014)

barney said:


> Seriously good post "Weat"  ... where have you been for the last couple of years  .... are you and TH mates?:




Don't want to interrupt the big wang-off...

...but I'm going to go and talk about my brain a while, and completely destroy my credibility.

Some years ago I lurked these here forums, and I remember TH. That's unusual, because I have a pretty weird mental condition that means I can forget almost anything that I don't think about pretty often. I often find out I have forgotten years, jobs, and even relatives - I once forgot a cousin who had lived with me for 6 months, about 2 years earlier (and now I can't remember which relative! I can only remember not-remembering, and getting **** for it). 

The last time I moved I found textbooks for the same subject, each 6 years apart. Had no idea I'd done the same course 3 times. In my last job it got so I was starting the same document 5 times (that is, I found 5 copies of the first draft in different places and with slightly different name conventions), and even, sometimes, having the same dot-point twice in the same list. 

Though now I'm on better meds...

Still though, the fact that I remember TH (even if not exactly why) suggests I went back and read his stuff every now and then, and I'd guess that means I hold him in some respect.

Probably.

(*him, because female traders are bizarrely rare - some learned facts never fade, usually because they confuse, interest, and/or anger me. And also because females tend to mask their contempt, and he doesn't).

Hah! I've got a blog of his in favourites! Hmmm, and old blog, 2010. Oh! He's the bloke who wrote the first two parts of a three part series on how to trade, and never did the third part! I remember that because I use it as an anecdote sometimes. Hahaha. I had totally forgotten who it had been, and honestly didn't expect ever to find out again.

Man, this whole conversation has made my day! Hahaha!

ANYWAY, if I'm parroting TH, it'll probably be because I'm quoting him word for word, but only remembered the substance, and not the source.

I don't respect sources, I respect what they say. And because I'm always forgetting, I'm always learning. Often stuff I already learned once already, I need to learn again. I'm good at learning, and at being wrong. That's why I reckon I'll be a good trader (again). Being wrong doesn't matter. You need to know you'll be wrong (and why, and roughly how often). You need to CONTROL being wrong. Own it. Don't curse a trade that lost money. You're SUPPOSED to get those. Look at it as another confirmation of your trades doing what you planned.

You might not hope for a trade to go to a loss, but the universe doesn't give the slightest crap for what you hope. What matters is what you expect, plan for, and most of all, what actually happens.

To go back to the subject, that's my advice: look on a stop hit as a marker, that you worked out in advance, that conditions are bad, or the setup is bad, or that your chances of profiting are now less than you losing. Hitting a stop isn't a failure - it's a sign your setup and planning and preparation and experience was right. Enter HERE, but if it goes THERE, get out.

"Here be dragons."

"Below here, I don't know anything. Get out."


...and yeah, I spend a lot of time thinking about trading. It's fun!


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## Weatsop (14 October 2014)

Yeah, no, that's just too wishy washy.

Here's what I mean:

Imagine you just missed your bread-and-butter entry. And the price blasts onwards, on one of those once-a-week winners that make half your profit.

And you freak out.

You forget where your stops would be, you forget everything, and you just buy and try to ride it.

What's the worst that happens?

If you said "it reverses and spanks you like the red-headed stepchild of a rented mule"...


...you are wrong.


The WORST thing that happens is the price goes bounding a mile into profit, and you trigger the exit with a grin on your face, and you stand up and go WOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO.

Why is that the worst thing?

Because you just taught yourself to trade like a moron.

Any dropkick can enter at random, get lucky, and leave with money. That same dropkick is going to burn his account looking for that same run of luck. That dropkick has all his mental rewards based around "ballsy" big-wins based on nothing but gut instinct. And he will get flogged. Maybe not today, but tomorrow. Soon. Inevitably.

You are not a dropkick. You are a trader. You'll be trading day in, and day out, for years. You will profit, over time, inevitably.

*Anything you can't do every time for the rest of your career, is a crap trade.*

And, the converse, is that everything you CAN do every day (and profit from in the long run), is a GOOD trade.

So. When "this" happens, I trade like "that". THAT, is how I trade every single time THIS happens. And I profit. I *win*. Even when I lose individual trades, I WIN, because this method nets me money.

---
I logged onto the MT4 site today and saw that people can put up black-box systems, that trade for you - they give you buy and sell instructions - and you pay the developer some money. The ones at the top of the list for the EUR/USD all had massive results, and a 100% win rate.

They are not lying. That's what they get. And yet, every account attached to that system is doomed. They're dead, and they don't even know it. They are zombie accounts.

I know that because I knew what the systems were before I even looked at the comments.

The EUR/USD has been on a long downtrend. So to get 100% wins, all you needed to do was go short, at random, and wait. WITH NO STOPS. If they'd had stops, a retrace might exit the trade, and they'd mess up their nice 100% record. But it kept going down, so all they needed to do was keep going short.

I stress, need*ed* to go short. Knowing the past, I know that a short play would win. Christ, knowing the past I could make an essentially infinite amount of money. Easy to do. Even if it takes some anxious moments - I saw people saying their account was 40% down, and others would say, it's ok, it's always right in the end...

The day the EUR/USD turns, all these people will be wiped out. They have no stops. They've trained themselves to ignore setbacks and keep going. It doesn't matter how big their accounts have grown, 100% of "a lot" is still *all of it*.

Sure, some will be lucky and pull their money out early, great. It's like a pyramid, or a Ponzi scheme. It's doomed, but if you get out early then you win. Now what? Where do you put your money now? Another Ponzi scheme? And then...? Another one? You can't keep being lucky. Eventually you will lose 100%. Putting money in a dip**** Ponzi scheme is a losing plan. Maybe not today, but eventually, it'll lose you everything.

Being RIGHT, is worthless. Count all your days, and see where you are.

...

Another example: the EUR/USD fundamentals. The US banks are holding (not a secret, but not often discussed) a ridiculous number of repossessed homes on their books, from 2008-ish. They have not (seriously, look at the books) been maintaining those properties. What do you think is left? Feel free to hire a photographer where your US bank is based, send them to repossessed properties, and get them to send you the results.

The paper value isn't even close to the actual.

Europe, with all its problems, is at least dealing with reality. It is competing against the USD which is, essentially, a phantasy. The USD isn't in a free market - nothing like it. There are too many big players with entire bloody economies at their fingertips who have a massive vested interest in keeping its value high. It is the world currency, and what happens in the US economy doesn't count for much anymore.

No matter how certain an eventual US crash becomes, the dollar rolls on.

If all of that is right (I don't know - and don't care. I'm a scalper. I'm proud to have no idea where the currency is going) - but if that's right, and YOU were right, and you went through the books and found the USD is "really" worth 70% of what it's valued at, and you traded that knowledge...


...well, look at the past year. If you'd gone long, you would have been crushed. You could have lost a thousand fortunes.

BEING RIGHT IS WORTHLESS.

If you're right, and the market is wrong, you will be murdered.

It's different if you're investing. An undervalued company will return to something like the true price eventually - the market can't argue with earnings and dividends forever. If you have deep enough pockets you can ride out the chop and come out happy. 

But I am (we are?) traders. Not investors. And fundamentals don't matter so much to us. We don't have the time or the account size to wait for everyone else to agree with our genius. We do not care what the market "should" have done. Take "should" right out of your vocabulary.

What matters to us is the price. You don't get to argue with the price. If the price goes down, no fiery sermon you give to your own waving fist will ever make the slightest god-damned difference. If the price goes down, you have two ways to profit: be short, or get out.

That's all there is.


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## barney (14 October 2014)

You do like to write eh Weat!  ..... Fortunately lots of us like to read  ..... good stuff.


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## Weatsop (14 October 2014)

barney said:


> You do like to write eh Weat!  ..... Fortunately lots of us like to read  ..... good stuff.




Hey, it's a complex issue, trading. If people want to stick to reading three-line posts, they'll never learn much of anything.

Also, I had a damn nice bottle of red after I finished last night, and that makes me talkative.


Though, yeah, I'll shoosh now. Gimme a few weeks to get properly settled, and I'll start a separate thread for the people who want to read slabs of text, rather than invade threads like a fungus, hahaha.


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## Trembling Hand (14 October 2014)

So_Cynical said:


> (and struggle to see it any other way)






DeepState said:


> Given the market is really people when it is truly considered (where would the market be without people? Even algo is programmed by - well - people) we must check to see if data in relation to people is useless. This is the natural extension. If people use data to make decisions, even that knowledge is useful.  However, if all data is useless, we are just random people doing random things.  When I meet someone in the street, I might say "lovely grass ice-cream to your purple catfish umbrella" - burp - and place my left shoe down their shirt.  The data I had for sentence formation and social interaction is useless.  And thus this entire text is the result of a bunch of monkeys typing, after they finished a Shakespearian novel.
> 
> Could be.  I don't have any useful data to know anything about the veracity of this.  If all data is useless, I don't even know what the concept of veracity actually is.  Maybe you are an algo housed within a cosmos which itself is entirely random. We don't actually exist.
> 
> ...




LOL and I was thinking you didn't have a sense of humour.


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## tech/a (14 October 2014)

Weatsop said:


> Hey, it's a complex issue, trading. If people want to stick to reading three-line posts, they'll never learn much of anything.
> 
> Also, I had a damn nice bottle of red after I finished last night, and that makes me talkative.
> 
> ...




If there is one thing I've learnt in 20 yrs. of posting 14000 posts.
People retain very little.
They read even less.
You'll waste a lifetime of productive valuable time posting up
quality info to faceless people who couldn't care less.
Then there is another batch who see anything that remotely looks like
practical application as nothing more than ego stroking.

Hence my brevity to the odd one it benefits.


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## Weatsop (14 October 2014)

Hahaha, fair enough sir!

But here's my secret: I learn by teaching. 

I catch myself holding vague, unformed ideas, unless I am forced to enunciate those ideas. I'll kid myself if I can get away with it. 

Try to teach, and you have to get right at the bones of what you believe. You have to squeeze that fog down into a drop of actual water, and see if it's clean or mud.

*Usually I teach an imaginary student in my head.*

Now I'm back into it again (and loving it, despite raging about brokers), I'm chattering constantly to myself (mouth closed). I'm teaching my imaginary student all my plays while I'm driving, while I'm on the bog, while I'm waiting in line. While I'm sitting in my kids' room to protect them from monsters until they go to sleep, because their mum is too damn soft on them. 

The posts I wrote above were just some of the foundational stuff I've been teaching my imaginary student. I just wrote the sort of thing I was thinking anyway.

Lately, my internal dialogue has been in the form of an epic post I haven't made, "How to scalp like me". I make and edit posts in my head.

And I think of what a student might ask. And two of the questions have been bloody excellent, because my first answers sucked, and the more I thought about them, the more I realised I needed to change the answers.

The first was: *why don't you enter long right THERE, instead of where you always do? Why wait for the second confirmation when the risk is so low?* 

And you know what? My student was spot on. I've gone over all the old entries and been trying it live, and it's a winner. I seem to scrape an extra 3 pips out of about 60% of that style of trade, for a 2 pip (counting comission) risk. That's money.

The second was: *if Forex is so dumb* (part of my introductory course is a section titled "Forex is DUMB"), *why don't you switch to Futs or something? Couldn't you take your dumb trading skills, and then get to know something with real fundamentals and more intelligible tape, and do that well enough to have an extra edge?*

...and the answer was basically - I think Forex is better for newbies... and because I'm a chicken.

So now I'm on a few hours early, I'm cracking my knuckles, and I'm starting to learn more about trading something different. I've still got lots of work to do on Forex, for sure (infinite amounts of work! That's why trading is so cool!), but I don't trade 'till 6, and don't really need to start dicking around with brokers until 3. Why not develop something during the day?

Christ, I talk a lot.

----
*Edit: but hey! At least it's on topic! How to get better, tip #328: talk to yourself.

So nyah.


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## Trembling Hand (14 October 2014)

Weatsop said:


> Hahaha, fair enough sir!
> 
> But here's my secret: I learn by teaching.
> 
> ...




Actually its a good idea. And one that many trades/professions follow.

Dr Brett a long time ago pointed out a well worn and proven path to competence (you know the step before mastery). It was the way medical students learnt from start to specialisation. Started with fundamentals of the body, moved on to different medical branches, then giving each student exposure to actually doing rotations through each dicapline. Then picking a specialisation towards the end of their studies. But it didn't stop there.

They also do the 


> "Each one teach one" is a motto of medical education.  The experienced physicians mentor; the advanced trainees coach--everyone is both teacher and learner.


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## Weatsop (14 October 2014)

Steenbarger, eh? A Google search finds a LOT of love.

My Kindle app thanks you, TH. Daily Trading Coach, sold, downloaded, in my pocket, ready to roll.

Technology rules.


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## barney (14 October 2014)

Weatsop said:


> I'm chattering constantly to myself (mouth closed).





Lol ..... I'm feeling pretty chuffed with myself right now ...... I admit I am still the worlds worst trader (well sometimes)  .... but  ...... over the past few months, I have been talking to myself while trading, only out loud

My wife who is usually in bed when I'm trying to sort out why I am the worlds worst trader often comments "who are you talking to"

So bearing that in mind, I feel I may be heading in the right direction!  ..... now if only I could learn to talk and trade simultaneously

I might pin this to the wall .....


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## VSntchr (14 October 2014)

Weatsop said:


> Though, yeah, I'll shoosh now. Gimme a few weeks to get properly settled, and I'll start a separate thread for the people who want to read slabs of text, rather than invade threads like a fungus, hahaha.




Hope you don't forget this idea!!!


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## Smurf1976 (14 October 2014)

barney said:


> My wife who is usually in bed when I'm trying to sort out why I am the worlds worst trader often comments "who are you talking to"




Personally I find that explaining something (whatever) to someone else is a good way to find out how much you don't know about it. Explain it, they'll ask questions, and you'll soon realise whether or not you can _confidently_ answer them.


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