Defining expectancy: KISS or Rocket Science? Which do you prefer and why?

Gringotts Bank · 15 December 2015

Re: Defining expectancy : KISS or Rocket Science? Which do you prefer and why?

cynic said:
Fortunately he was still in the questioning phase of his search and given his acumen, I suspect he would have quickly recognized the logical flaw in the information in his own time.

Others that Ive encountered in the past weren't as fortunate. Some had developed such unshakeable faith in their chosen guru that they were quite simply unable to contemplate any concepts/perspectives to the contrary.

That's not to say that RR and related measures aren't useful when applied within an appropriate context ,with due regard to scope and limitations, it just frustrates me that I have to explain so much more than might otherwise be necessary when attempting to convey one of the most important and simple concepts of trading to others.

P.S. A big thankyou to all contributors to this thread so far. Given that I do not want this thread to become too onesided, I'd like to encourage those, whom like quant, have an appreciation for the application of statistical approaches to formulation and management of their trading to freely contribute their perspective and experience.

The thing about gurus is that they afford you the other type of expectancy (psychological expectancy). As strange as it sounds, I know of situations where I consider this worth paying for. If a guru has a rock solid belief in his [statistically useless] approach, and can convey that belief to his followers, the followers should in theory trade much better. This is because fear has been removed from the decision-making process. I could dig up some scientific papers on fear and decision making in finance if anyone is interested.

So, if you compared two groups:

1) guru backing, high ++ psychological expectancy with random entries on random stocks, choose your own exits

2) random entries on random stocks, choose your own exits

...and then compared the returns on each, I'd be very confident group 1 would outperform group 2.

All this is aside from statistical expectancy; a different topic.

cynic · 15 December 2015

Re: Defining expectancy : KISS or Rocket Science? Which do you prefer and why?

Gringotts Bank said:
The thing about gurus is that they afford you the other type of expectancy (psychological expectancy). As strange as it sounds, I know of situations where I consider this worth paying for. If a guru has a rock solid belief in his statistically useless approach, and can convey that belief to his followers, the followers should in theory trade much better because fear has been removed.

So, if you compared two groups:

1) guru backing, high ++ psychological expectancy with random entries on random stocks, choose your own exits

2) random entries on random stocks, choose your own exits

...and then compared the returns on each, I'd be very confident group 1 would outperform group 2.

All this is aside from statistical expectancy; a different topic.

That's a very interesting perspective. Ive often noticed that some traders ascribe so much importance to their setup they fail to notice just how often the risk management of the trade turns out to be the determining factor. For example if the market can only move up or down and the direction of the next move is theoretically uncertain, and the trader's Strike rate happens to be only sufficiently high to accommodate 1 unit of risk for every 3 units of reward, (i.e.win rate marginally above 25%) then one wonders whether an RR of 1 to 1 combined with faith in a dartboard might not prove similarly effective?

systematic · 15 December 2015

I'll ignore all comments and just respond to the OP like this:

I'll cast my preference as KISS not rocket science.
I come from a (long forgotten) background where expectancy can be defined accurately*. The market is not such a place.
As a long(er) term trader (some call that 'investor,' but whatever), I barely think in terms of expectancy. In the real world, traders learn to think in terms of expectancy because they often have stops, or have read Van Tharp and think in terms of risk multiples etc.
I look at all kinds of stats. All of them are only so useful (yet I love them all).
But for a different perspective for this thread, expectancy is not something I even really think about. I just don't need to.

*In a misspent youth. For any newbie reading. Don't be daunted by any of this. Expectancy in a fixed system is as simple as the old example:

If you and I were to play a coin toss game, and I gave you $1.10 for every time you bet $1.00 on heads (and won) and $1.00 for every time you bet on tails (and won); well for a start you should only bet on heads.
Half of the time you'll outlay $1.00 and win $1.10; the other half of the time you'll lose a dollar.
The outcome over 200 bets therefore, is that you'll:
- outlay $200 on 200 individual, $1.00 bets
- you'll lose 100 of the bets (heads or tails, remember)...so you'll lose $100 on those, right?
- you'll win 100 of the bets (heads)...and because I'm paying you $1.10 for each heads...you've just made $110
- The $110 you made on heads minus the $100 you lost on tails , leaves you with what? $10 bucks.
- You have a $10 profit from 200, $1.00 bets
- So; you made $0.05 (5 cents) a bet, right? $10 profit, divided by 200 bets, equals 5 cents per bet.
- You are making 5 cents a bet per $1 bet.
- That's 5% (5 cents, divided by 100 cents)
- You have a 5% expectancy

Congrats; you are now officially a quant!

Newbie; (I say newbie, because I don't want to insult anyonen else!)...this is why you shoudn't play the pokies. Same thing, only in the house's favour (and more than 5%)

For many investors (yes, I'm being somewhat diplomatic, there) - that's about all you need to understand about expectancy. You have one, that's for sure. You just want it to be positive (the coin toss game), and not negative (the pokies).

...Mine is only one perspective. Others may validly place more importance on it.

Quant · 15 December 2015

systematic said:
I'll ignore all comments and just respond to the OP like this:

I'll cast my preference as KISS not rocket science.
I come from a (long forgotten) background where expectancy can be defined accurately*. The market is not such a place.
As a long(er) term trader (some call that 'investor,' but whatever), I barely think in terms of expectancy. In the real world, traders learn to think in terms of expectancy because they often have stops, or have read Van Tharp and think in terms of risk multiples etc.
I look at all kinds of stats. All of them are only so useful (yet I love them all).
But for a different perspective for this thread, expectancy is not something I even really think about. I just don't need to.

*In a misspent youth. For any newbie reading. Don't be daunted by any of this. Expectancy in a fixed system is as simple as the old example:

If you and I were to play a coin toss game, and I gave you $1.10 for every time you bet $1.00 on heads (and won) and $1.00 for every time you bet on tails (and won); well for a start you should only bet on heads.
Half of the time you'll outlay $1.00 and win $1.10; the other half of the time you'll lose a dollar.
The outcome over 200 bets therefore, is that you'll:
- outlay $200 on 200 individual, $1.00 bets
- you'll lose 100 of the bets (heads or tails, remember)...so you'll lose $100 on those, right?
- you'll win 100 of the bets (heads)...and because I'm paying you $1.10 for each heads...you've just made $110
- The $110 you made on heads minus the $100 you lost on tails , leaves you with what? $10 bucks.
- You have a $10 profit from 200, $1.00 bets
- So; you made $0.05 (5 cents) a bet, right? $10 profit, divided by 200 bets, equals 5 cents per bet.
- You are making 5 cents a bet per $1 bet.
- That's 5% (5 cents, divided by 100 cents)
- You have a 5% expectancy

Congrats; you are now officially a quant!

Newbie; (I say newbie, because I don't want to insult anyonen else!)...this is why you shoudn't play the pokies. Same thing, only in the house's favour (and more than 5%)

For many investors (yes, I'm being somewhat diplomatic, there) - that's about all you need to understand about expectancy. You have one, that's for sure. You just want it to be positive (the coin toss game), and not negative (the pokies).

...Mine is only one perspective. Others may validly place more importance on it.

It goes without saying if you have no edge you have no positive expectancy , its a gamble

Edge is a slippery slope as well for many think they have an edge but they have no statistical proof

Guessing is what many traders do with a lot of these stats as it is hard work defining real probabilities and Risk/reward , truth be known those with a static system are just biding time till it all unravels ...

The only systems traders that have a system that stands the test of time have developed intuitive models that are way beyond the realm of 99% of traders and that's being kind , years involved in development of said systems

Data miners will never achieve a thinking system , its the world of a price action trader that can mathematize price action

True experienced price action traders with a great head for maths and a penchant for coding are the eligible participants ... a rare combination indeed

A lot of tenacity required and some serious cognitive ability required , Kiss is great but if you want to be elite you need to think like a rocket scientist , its nothing but a choice albeit one to not take lightly

PS I don't need to be right I just want the money

craft · 15 December 2015

Quant said:
It goes without saying if you have no edge you have no positive expectancy , its a gamble

Edge is a slippery slope as well for many think they have an edge but they have no statistical proof

Guessing is what many traders do with a lot of these stats as it is hard work defining real probabilities and Risk/reward , truth be known those with a static system are just biding time till it all unravels ...

The only systems traders that have a system that stands the test of time have developed intuitive models that are way beyond the realm of 99% of traders and that's being kind , years involved in development of said systems

Data miners will never achieve a thinking system , its the world of a price action trader that can mathematize price action

True experienced price action traders with a great head for maths and a penchant for coding are the eligible participants ... a rare combination indeed

A lot of tenacity required and some serious cognitive ability required , Kiss is great but if you want to be elite you need to think like a rocket scientist , its nothing but a choice albeit one to not take lightly

PS I don't need to be right I just want the money

Quant, can you define edge (in a trading sense)?

cynic · 15 December 2015

systematic said:
I'll ignore all comments and just respond to the OP like this:

I'll cast my preference as KISS not rocket science.
...

...Mine is only one perspective. Others may validly place more importance on it.

Many thanks for your input systematic. It sounds like you've arrived at that enviable pinnacle of certainty regarding your trading outcomes.

In addition to your great expectancy example, I was also impressed with the generosity of your last statement which readily allows a space for those holding alternative viewpoints.

Quant · 15 December 2015

craft said:
Quant, can you define edge (in a trading sense)?

Edge = advantage , in my case proven ( in my eyes ) mathematically back and forward tested . Ultimately the true test of a trader is the curve of P&L

galumay · 15 December 2015

Quant said:
It goes without saying if you have no edge you have no positive expectancy , its a gamble

Mmm...thats a wildly sweeping 'absolute' - stated with certainty (which always makes things look more convincing!)

Traders and those of a technical bent often seem well able to convince them selves they have an 'edge'.

I am more like craft in this philosophical difference of opinion - no real use for the concept of 'positive expectancy', but then I am not sure many long term investors would.

There is something to be pondered about the strength of human ambition to find absolutes where its likely few exist.

Quant · 15 December 2015

galumay said:
Mmm...thats a wildly sweeping 'absolute' - stated with certainty (which always makes things look more convincing!)

Traders and those of a technical bent often seem well able to convince them selves they have an 'edge'.

I am more like craft in this philosophical difference of opinion - no real use for the concept of 'positive expectancy', but then I am not sure many long term investors would.

There is something to be pondered about the strength of human ambition to find absolutes where its likely few exist.

Lets not confuse positive expectancy with an absolute , an edge is a statistical advantage not a guarentee

minwa · 15 December 2015

Quant said:
Edge is a slippery slope as well for many think they have an edge but they have no statistical proof

Quant I notice you use a lot of diagonal drawn trendlines but you sound like a very mechanically rules trader. How do you incorporate the trendlines which is open to different interpretation into your statistics of testing ?

craft · 15 December 2015

Quant said:
Edge = advantage

Ok so define advantage (in a trading sense)

Quant said:
Ultimately the true test of a trader is the curve of P&L

Now see that is what I think cynic is saying. the ultimate test is profit. (achieved over enough occurrences to eliminate the impact of randomness)

but I also agree that the strike rate (win/loss ratio or whatever you want to call it) component when you break profit down into expectancy is important for position sizing and risk of ruin.

ps

enjoyed your post too systematic. ASF could do with a thanks or thumbs up button to make showing appreciation easier I reckon.

cynic · 15 December 2015

galumay said:
...
There is something to be pondered about the strength of human ambition to find absolutes where its likely few exist.

I largely agree. I suspect that mankind's desire for certainty arises from insecurity and fear of the uncertain/unknown. Hence the commonplace insistence by some in having possession of an infallible and immutable truth/certainty. For such individuals, acceptance that their infallible belief might actually be subjective, rather than absolute, or perhaps even totally wrong, is too scary for some to contemplate as it would require embracing uncertainty and aÃ§cepting the uncomfortably fearful state of once again being confronted by a world of the uncertain/unknown.

An illusory sense of control is so much more comforting to some than the reality of powerlessness within one's environment.

Quant · 15 December 2015

minwa said:
Quant I notice you use a lot of diagonal drawn trendlines but you sound like a very mechanically rules trader. How do you incorporate the trendlines which is open to different interpretation into your statistics of testing ?

Does anyone else get so many questions in their first 2 days ;-) ... I draw my charts for public display in a price action style that has served me well for over a decade and in the main they do reflect what you will see in my algo charts ' but ' if I posted my algo charts almost #1 no-one would makes sense of it #2 id get asked 10 times more questions than I do #3 my algo charts are my IP and I am not keen to give anyone the chance to reverse engineer basically what has taken me the best part of 5 years to evolve

trendlines are reflected in my algo with trend filters amongst other things , my algo is mechanical but not automated ..... yet

PS .. hint trends are a series of higher or lower swings , that part is easily coded ..

fraa · 15 December 2015

Without rules (absolutes ?) to structure the unknown, you will have nothing to guide your action and so you cannot "act" (excluding that not acting can be a conscious decision). You have to have something - otherwise there is no thought and you might as well go two face and flip a coin.

Quant · 16 December 2015

fraa said:
Without rules (absolutes ?) to structure the unknown, you will have nothing to guide your action and so you cannot "act" (excluding that not acting can be a conscious decision). You have to have something - otherwise there is no thought and you might as well go two face and flip a coin.

Seriously lets not twist words , challenge you to find a definition of rules that includes absolutes .... my rules are filters ... nothing more , a combination of filters will come up with a result that will give a statistical edge if you follow the result , nothing more & nothing less . Is it that hard of a concept to follow ... lets not make it something it is'nt

I am not answering any more questions today .....

the concept of an algo is a flow charts with a series of questions asked that alter the path , that's the easy part ..... its the questions that are the difficult part

lets leave it there ...... Google is an option , go explore

cynic · 16 December 2015

Quant said:
Does anyone else get so many questions in their first 2 days ;-) ... I draw my charts for public display in a price action style that has served me well for over a decade and in the main they do reflect what you will see in my algo charts ' but ' if I posted my algo charts almost #1 no-one would makes sense of it #2 id get asked 10 times more questions than I do #3 my algo charts are my IP and I am not keen to give anyone the chance to reverse engineer basically what has taken me the best part of 5 years to evolve

trendlines are reflected in my algo with trend filters amongst other things , my algo is mechanical but not automated ..... yet

PS .. hint trends are a series of higher or lower swings , that part is easily coded ..

I can recall at least a couple of enthusiastic members of this forum also being initiated with something akin to a baptism in blood and fire. Those members were understandably uncomfortable with their reception at the time, but the community consequently warmed to them a lot more quickly on those occasions.

systematic · 16 December 2015

craft said:
ASF could do with a thanks or thumbs up button to make showing appreciation easier I reckon.

...Totally true; I was looking for the, 'like' button on your post, at the same time.

cynic · 16 December 2015

fraa said:
Without rules (absolutes ?) to structure the unknown, you will have nothing to guide your action and so you cannot "act" (excluding that not acting can be a conscious decision). You have to have something - otherwise there is no thought and you might as well go two face and flip a coin.

A very good friend of mine improved his trading performance when he decided his trades with the roll of a dice. Each number represented either a long or short entry on one of three trading instruments. The first six times he used it to decide his trades, his trades were suÃ§cessful. Thereafter he decided not to push his luck. There's a lot to be said for random trading on NFP nights!

Edit: I forget to mention - do not try that at home, my friend has an uncanny amount of luck with dice and card games!

minwa · 16 December 2015

Quant said:
Does anyone else get so many questions in their first 2 days ;-)

OK thanks for answering.

As for the questions, do keep in mind that you are newly registered, and use big words and highlight profitability in almost every early post you made - that's my impression. Lots of ego clash. We also get many like these then they start advertising courses/wares. I mean no offense at all, just my observation.

Its more of a guilty until proven innocent culture here. And I think it's fair personally - it's the internet and the primary topic is money related.

I recall when RY/DS registered and also talked "big" was also "tested" with these questions/resistance initially is now a respected member.

Gringotts Bank · 16 December 2015

cynic said:
...an uncanny amount of luck with dice and card games!

LOA - you know it!

Defining expectancy: KISS or Rocket Science? Which do you prefer and why?

learner

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