Duc, you mention Currencies as both 'long trending' and 'mean reversion' in nature. Was that deliberate?
Duc, you mention Currencies as both 'long trending' and 'mean reversion' in nature. Was that deliberate?...........................The timeframe is a critical component, as is the choice of market. So long trending markets: Bonds, Currencies and with the current QE, stocks (which have gone up since year dot, with a few bad breaks). Reversion to mean markets are Commodities and Currencies.
Anyway, far too long a post.
jog on
duc
Duc, you mention Currencies as both 'long trending' and 'mean reversion' in nature. Was that deliberate?
I'm sure it is just my pea brain not comprehending what you are saying, but if by "higher number of trades taken" you mean with reference to the total number of trades taken over a certain period of time (e.g., 5, 10, 20 plus) years then I completely agree with what you say.
But if this is simply about saying: if your system has an edge then moving from say a max of 10 simultaneous open positions to a max of 20 simultaneous open positions then I don't agree with that. But I think you are referring to the former and not the latter?
I'm not sure what you're saying here. Are you saying your hypothetic system's edge is only there when you take up all buy signals it generates? As a general statement you absolutely do not need to take all positions a system throws up to have an edge. If your system throws up more buys than you have capital then a well thought out and tested ranking and selection of buy signals will absolutely remove a significant part of the randomness you reference. Sure if you don't employ a good technique for ranking and selecting buy sigs in situations where capital doesn't allow you to take all entries (and let's face it that is most people) then sure a degree of randomness will be present, but surely even simple retail system traders would employ the most rudimentary ranking mechanism for buy sigs which would address some of the randomness.If a system with a true edge, throws up 100 trades in a week, all those trades ought to be taken. Now, due to the number of trades, our trader may not have the available capital to take all 100. He may only have the capital to take 50.
Can I add a bit of a twist from my view:Mr MA,
Both, but possibly not quite how you have stated it. Let me clarify.
Since we agree on one, we only need discuss the one that we don't agree on.
Just to clarify my position re. proposition #2:
If a system with a true edge, throws up 100 trades in a week, all those trades ought to be taken. Now, due to the number of trades, our trader may not have the available capital to take all 100. He may only have the capital to take 50.
My assertion is: this could negatively impact the system (or conversely positively or not at all) because the 'edge' is only valid when you take all of the trades. In taking only 50, we are now subjecting the trades to the law of small numbers: ie. randomness/luck play a much larger role in the results.
A thought experiment:
If a system, with a true edge, throws up 100 trades then are:
(i) all trades winners? If yes, then only taking 50 will reduce the number of winning trades. If no, then;
(ii) which ones will lose? Do we know the answer, yes/no?
(iii) if we know the answer to (ii) as a yes, then we will only take the winning trades.
jog on
duc
I agree entirely with this.So yes I expect to have better results for limited number of position, but not to the extreme I saw
Glaringly absent on this thread is anyone building a system, actually stating what their edge is, in simple and concise terms. (assuming there is a true edge)
a degree of randomness
I never understand what exactly "edge" is meant to reference....I see it thrown around a lot but the way I see it commonly used I assume it is with reference to the high level strategy underpinning your system--which might include entry/exit rules, risk management, position sizing, ranking etc etc.A traders edge
@ducati916 & @MovingAverage may be onto something debating an edge. The question for me is - "when is an edge useful" when it comes to trading. The edge might be nothing more than the randomness of entries or the confidence to have a go. Randomness could be anything & everything from, the volatility of the markets, external influences, or world events - who knows!
Can I add a bit of a twist from my view:Mr MA,
Both, but possibly not quite how you have stated it. Let me clarify.
Since we agree on one, we only need discuss the one that we don't agree on.
Just to clarify my position re. proposition #2:
If a system with a true edge, throws up 100 trades in a week, all those trades ought to be taken. Now, due to the number of trades, our trader may not have the available capital to take all 100. He may only have the capital to take 50.
My assertion is: this could negatively impact the system (or conversely positively or not at all) because the 'edge' is only valid when you take all of the trades. In taking only 50, we are now subjecting the trades to the law of small numbers: ie. randomness/luck play a much larger role in the results.
A thought experiment:
If a system, with a true edge, throws up 100 trades then are:
(i) all trades winners? If yes, then only taking 50 will reduce the number of winning trades. If no, then;
(ii) which ones will lose? Do we know the answer, yes/no?
(iii) if we know the answer to (ii) as a yes, then we will only take the winning trades.
jog on
duc
For me an edge.. positive edge is anything which will give you higher returns than the matching indexI never understand what exactly "edge" is meant to reference....I see it thrown around a lot but the way I see it commonly used I assume it is with reference to the high level strategy underpinning your system--which might include entry/exit rules, risk management, position sizing, ranking etc etc.
1. I'm not sure what you're saying here. Are you saying your hypothetic system's edge is only there when you take up all buy signals it generates?
2. As a general statement you absolutely do not need to take all positions a system throws up to have an edge.
3. If your system throws up more buys than you have capital then a well thought out and tested ranking and selection of buy signals will absolutely remove a significant part of the randomness you reference.
4. Sure if you don't employ a good technique for ranking and selecting buy sigs in situations where capital doesn't allow you to take all entries (and let's face it that is most people) then sure a degree of randomness will be present, but surely even simple retail system traders would employ the most rudimentary ranking mechanism for buy sigs which would address some of the randomness.
Can I add a bit of a twist from my view:
->100 trades proposed by the system:
these trades have a higher probabilities of winning than randomly chosen ones-> " our edge"
not all will win, but we know that we also select n of of these based on another statistically favorable criteria : a preference order: the score
So we have another variable in our equation:the preference criteria, so not binary buy sell, more "in buy pool" or sell
And even based on its score, the 10th choice today may ( will) have a different probability of a win vs tomorrow's 10th proposed entry
Basically we can see it that way: my system might offer a couple of trades per week ( I believe this is your vision)
or
a pool of higher than average candidates that we will pick from (trying as well to put better odds in that selection) aiming an average win/loss ratio >1;
[with all index twists, panic exits coded, etc]
I run both types of systems.
One pretty selective with low number of entries (my weekly ) with maybe 4/5 entries suggested per week;
and some like Guppy ->250 or so trades in less than 4 months.
36 entries offered this morning, 13 yesterday for 13 position max...
-> this school of mind in line with Mr Skate's view that in trend following,
the entry is not critical, just exit if wrong and roll the dice again;
I obviously caricature a bit.
Market as a casino where you can exit at will, with limited loss and unlimited win potential...within limits
-> a number game.
Hope this explanation is not too blurry.
So yes I expect to have better results for limited number of position, but not to the extreme I saw
:
For me an edge.. positive edge is anything which will give you higher returns than the matching index
even just buying this index etf and exiting on a crash and reentering after.
So i think everyone has his own interpretation.
Really, you have to take all positions to define an edge? Come on...I'm curious, do you actively trade systems?1. Essentially, yes. That is the purpose of defining an edge.
2. Well no you don't, but then you are trading something other than your edge.
3. Which is the law of small numbers writ large. You are selecting a sample from a sample. The only way this is false is if your edge as identified has a 100% win rate.
4. There is no 'good' technique. You are dealing with a too small sample to ascribe any statistical significance to it. It will be random/luck.
Your position is essentially this:
(i) I have a system with an edge that delivers 20 trades/week to me; and
(ii) I can only assign capital to 5 of them each week; therefore
(iii) I will only take the winners and discard the rest.
Therefore, if 1 trade out of the 5 selected is actually a loser, then the above statement must be false, based upon Popper's falsifiability.
jog on
duc
1. I never understand what exactly "edge" is meant to reference....I see it thrown around a lot but the way I see it commonly used I assume it is with reference to the high level strategy underpinning your system--
2. which might include entry/exit rules, risk management, position sizing, ranking etc etc.
1. Really, you have to take all positions to define an edge? Come on...I'm curious, do you actively trade systems?
2. Anyway, I've been down this path with you before and I'm a grumpy old man who likes to argue....so let's just agree to disagree After all, the fact we all have differing approaches is what allows us to trade.
Now we are getting somewhere. Yes, an edge can be include your list in [2]. However, that is not what I define an edge as. I define an edge as a strategy that has a positive expectation in any market conditions, including outliers (Black Swans). In fact, a true edge actually benefits from an outlier.
I trade 3 strategies. 2/3 have the edge described above. The other, does also, but not to the added qualification of outliers. For that I need luck.
Some of these systems I doubt actually have an edge at all in terms of [1]. They seemingly derive their edge from [2].
jog on
duc
Sometimes, but not consistently so the MC runs on top of long enough test perios to ensure enough trades.The problem is that total randomness can also beat the index.
jog on
duc
Yup, anyone that does proper analysis and understands systems would not seriously suggest that a random system CONSISTANTLY beats the index. That is just a naïve statement.Sometimes, but not consistently so the MC runs on top of long enough test perios to ensure enough trades.
View attachment 122479
There's a great article by Andreas Clenow HERE on the subject of why randomness will beat the index / funds.
1. A traders edge
@ducati916 & @MovingAverage may be onto something debating an edge. The question for me is - "when is an edge useful" when it comes to trading. The edge might be nothing more than the randomness of entries or the confidence to have a go. Randomness could be anything & everything from, the volatility of the markets, external influences, or world events - who knows!
2. System trading
This type of trading relies solely on exploiting a perceived edge rather than an edge. System trading is purely a vehicle to "timing the markets". But what if there is no "real edge" but fooled into thinking there is one. What if our trading results are purely down to "luck". Pure luck in "timing the entry/exit?" - it's food for thought.
3. Thinking about trading on a deeper level
I might be fooling myself, thinking I have an edge but in reality, I have no edge at all. My trading returns could be from being a lucky trader. I truly hope not as it means that I've wasted a chunk of my life.
Trading results of approximately 600 trades (over the last two years)
I could be mistaken but I believe the stats below are in line with trading a "trend following strategy" & nothing spectacular. The statistics are the "average returns" from trading a multitude of strategies (instead of just one). The performance of individual strategies varies but in combination they tend to even out my equity curve (my trading emotions).
View attachment 122474
Skate.
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