DeepState
Multi-Strategy, Quant and Fundamental
- Joined
- 30 March 2014
- Posts
- 1,615
- Reactions
- 81
My opinion?
I'm a builder not a financial whiz.
I have a number of areas I work
With for my long term financial
Security.
So is this a general or specific chat.
With regard point one.
Specific as in Trading only.
R/Y
Just on reading your post it appears your looking at systematic trading
OR
are you encompassing discretionary trading in the same
bundle with your interpretations of signal and risk management?
Which is correct?
Will have time to devote to this in discussion form tonight.
A 'signal' is the attempt to discern market movement. It is a directional prediction on something. The signal has power if it actually predicts accurately to some degree. It can be worthless if it has no predictive value at all. Worse, behavioural biases can lead signal value for investors to be negative. A signal can be anything that purports to be a prediction. It can be the length of skirts to a 50 page valuation or 1 million lines of code in a neural net algo, to a 20% Flipper. It doesn't matter what generates a prediction for these purposes. A signal is a predictor. If you give up, your predictor goes to zero.
'Risk Management' is any activity which determines position sizing.
. In itself no but as a variable yes in the contexts of Risk/s I look at I think it does help It may skew a method from loss to profit---in the context of Risk Factors i consider.Risk management does not make money
If your signal is static electricity, no amount of risk management will improve your expected return. It can change the shape of your probability distribution, but it cannot change the expected return.
In other words, with no ability to know where the markets are going at all, you have no expected return. Just whacking a 5% stop on it doesn't add any value whatsoever in terms of expected outcome. It just changes the pathway.
Setting stops, trailing stops etc. just changes the pathway, but not the expected trajectory of the pathway. I call this bending/reshaping the distribution. You can change position sizes, implement different ones in rotation each Thursday...same deal. No change in expected outcome.
Over to you.
So far so good. I prefer to use the word anticipation as I don't actually know where I'm going to exit (At the time of entering) but for ease of description---
Broadly I think its more than that --- various risks(Capital/Time/Portfolio/Opportunity/Trade/Market Liquidity and believe it or not Macro Fundamental risk)---to which effect what I do.
. In itself no but as a variable yes in the contexts of Risk/s I look at I think it does help It may skew a method from loss to profit---in the context of Risk Factors i consider.
I think it a poor example but I presume you mean a which has no directly logical reason for an entry in a stock to be taken.
Again a broad brush.
If completely random I agree---I think---I haven't tested your theory to give me an outcome---but I have seen evidence of a simple filter and then a random entry having a positive expectancy.
I remember seeing a test once which returned a positive expectancy where all members of the data set were showing a positive up trend. The buy signal was Thursday. The results were improved with your explanation of Money Management. I didn't keep it but would have been perfect for this argument.There are other tests I have seen based on nothing more than a time of day. While not brilliant they returned a positive expectancy.
I'm sure they are out there and I'm sure they could be replicated---I don't have the time or inclination to do so---but if I find one ill be sure to post it up.
Yes agree with regard to expected outcome. A combination of risk minimizing factors can have quite an effect on trading results.
Broadly in agreement I guess.
Yes---and your point being?
Stop loss is not expected to be your friend.....on average, through time.
Hmm
Don't think it's as clear cut as that
Your implying that unless you have an
Entry that is better than random then
Any sort of stop is simply pointless
The entry is the focus
Am I reading that correctly ?
On average, there is zero alpha. Trading is generally regarded as extracting alpha given the time frames are very short and risk from trading completely dominates anything else. When you have zero alpha, which is the population average alpha (ie no idea what the entry points should be) then no amount of risk management is going to make you money.
If you have got an idea of what superior entry points should be, the addition of stops will actually decrease your expected return.
.On the other hand, if you are a wanton value destroyer (essentially taking the opposite positions of the people with an idea of what is going on), then stop losses will add value by helping you to stop losing value. The stop should be so tight that you never trade
.The relationship between having stops at the entry point when you are a value destroyer and having no stops when you are a value creator should be evident
If your entry points are selected by chook raffle or listening to static electricity on your AM band radio, having super-tight stops or no stops produces the same expected outcome....zero, before expenses.
The above is only talking about money making and says nothing about risk adjusted returns. Stops do not add value on a population average in these terms.
.It is reasonably argued that they can add value in psychological ways by helping you sleep at night
Further, if you do not value a loss and gain as equals, it can help on that. However, these are issues of psychology and not outright money making.
The original statement I made was that some tech practitioners, including those who publish and are widely followed in discussion and courses, seem to think adding stops makes you money just by doing it (on average, through time).
It does not. Individual outcomes may yield that result as tossing coins will yield profit sometimes, but there is no systematic profit to it. That's all I'm claiming on this thread.
You are benchmarking this against what?
Any profit at all?
You know this how?
Sorry I don't see this having meaning---is it a sarcastic comment?
Well they're not--what is a value destroyer--how do I destroy value?
What's is a value creator--how do I create value?
Hardly an argument of value when looking at whether stops are important in helping skew your numbers your way---as I don't know of anyone on the planet who uses such entries??
Again a broad brush---how do you know this?
Sorry don't agree.
If we are to let profit's run and cut losses short one way is to introduce trailing stops.
I don't know of anyone who says this---can you give an example?
So back to random.
(1) Can the inclusion of stops(any of Initial stop/Breakeven stop/Trailing stop---blah blah---skew a method which has an entry which is designed to identify a potential movement in the direction of a desired trade---more toward a profit or in fact increase profit from a method where an exit is the only way to close out a trade---in your view??
(2) Are stops a complete waste of time---any stop in any situation?
...but there is no systematic profit to it. That's all I'm claiming on this thread.
For me it's a personal decision re: whether the risk of profit reduction is greater or less than the potential for draw down reduction.
Cash
Options pricing.
Not attempting to be sarcastic. If you (this is a general reference, as in plural. Not targeted at you) are actually hindered and do the opposite of making money (behavioural biases can cause this) then you are better off not trading at all. Stops add value to these kinds of people by stopping them from trading at all.
I should add, all of this relates to the kinds of stops that reduce position size.
Value is defined as making money over cash. You create value by having predictive ability and deploying it into markets. This can come from certain types of technical analysis, fundamental analysis, combinations, information arbitrage...anything which has an effective edge in the market.
Static and coin tosses, monkeys with darts...are all analogies (albeit doable) for a prediction process that has no value. People do fundamental and technical analysis. Just because they do doesn't mean that this is a license to print money. The value of most of it is actually zero.
.It is a tautology. No maths is required or any simulations
If your position is expected to go up and you have predictive ability, stopping out via trailing stop destroys value on average through time. Options pricing.
Mr NR. "Successful Stock Trading - A Guide to Profitability". Chapter 1. An example is given relating to an Excel simulation which leads on to all sorts of stuff on win/loss ratio at the expense of winning percentage. You can make of it what you will. Clearly a lot of people believe this. It might be fruitful to ask Kris to check the maths behind the simulation and the claims. I will not comment further.
The average player is effectively random in alpha terms. It is a tautology.
Adding stops etc. changes the distribution of expected outcomes. You can skew it anyway you like. If you have skill, the kind of stop which involves cutting positions will net destroy value in terms of money making expectations. For example, you can start with an initial stop loss and roll up to B/E. If you have skill, this will lose you money. It will, however, do this by producing a string of small losses and a smaller number of gains, some of which can be large.
No. They are valuable. I am only saying they don't make money on average.
Using them in the manner you described increases the chances that you will make money over the longer term if you have skill. It does this at a cost to your expected return at the outset.
If you have liquidity issues or leverage issues, their value is present just to keep you alive, if you have an edge.
Nothing can save you in the longer term if you have no predictive value or are a wanton value destroyer (generic).
All I am saying is that stops do not make a person money in and of themselves on average, through time. That's it.
I would argue that if say you are an amazing trader with great expectancy, and your stops are based on signals rather than fixed x% away, you are actually adding value as the stop is in effect another 'trade'.
I've lost the value of introducing a completely different instrument to the discussion of stops in Stock Trading.
Wow that's really encompassing everyone with zero knowledge.
While some gamble the stock market most wouldn't use any sizable funds. I really don't think this discussion was ever meant to encompass total novices---well I didn't.
Exactly. All of these are arbitrary random positions. No information, no expected return.Hang on an arbitrary Ill buy 10000 CBA is a stop in itself.
Another example.
I can have No stop and at the point of X place a stop at B/E
Well with the experience I have with Systems testing I have seen improvement in all with the addition of stops. (Tautology)
Yes I agree that most actually lose---but I wouldn't say it could be directly related to placing stops.
Stops actually are options.Again I cant see the benefit of comparing with options.
You have all sorts of stuff to consider with options--time decay in the money out of the Money At the money options. How does this help in the discussion.---are we talking options?
I read ASF.Ill have a look. But why is it CLEAR a lot of people believe anything?
After expenses, yes. Before expenses, no.Negative I would suggest---net losers.
That's a tautology if your world is devoid of probability and focuses on selected outcomes only. However, the very fabric of the universe is probabilistic. You will find these things occur, but the expectations inferred in terms of money making ability do not follow.My experience is that the END reward to Risk is actually increased as we have not only really small losses we also have No loss (other than Brokerage) on losses and accumulated winners (Profit) far exceeds Accumulated Losses.
In fact 1 win can demolish many B/E stop outs and many small losses. The number of trades required to claw back a string of losses is far less than if I had a stop only and way way less if I didn't have one at all.
----Tautology
Perhaps in some circumstances but the exact opposite in others.
Ok but I don't think this discussion has helped those who think they have an edge ---don't use stops and have found that their portfolio is anything but impressive due to a few really destructive losses.
A stop is a binary put option
With that caveat...'and your stops are based on signals'...I am on the same page. This is where it comes to a definition. Stops as you propose are actually predictions as they are based on informative signals. It's like the reverse of an initiation that was formed via informed signal. You are just initiating another informed trade which offsets the first one. In the context of the recent exchange where stops are expressed as risk management only (ie. no predictive ability in an of themselves), they don't add value.
If you have predictive ability, skyQ is the limit.
.In the context of the recent exchange where stops are expressed as risk management only (ie. no predictive ability in an of themselves), they don't add value
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?