How I Trade As If Price Is Random

[DbPhoenix 42]

ET phone home - never heard of it.

 

is that where we would find...

1a2b3c.....

"This system can be backtested, and I've been posting 100% of my trades with live calls for years (something other people who share systems never do)."

 

if this has all been said and done before elsewhere are we just going to be mean reverting?

or is it all just random in which case who cares?

and why move to TL - is it because we are such noooice people.

 

TLers used to be fairly rigorous in their due diligence, key words being "used to be". In any case, beginners need to become familiar with the protocols. And that means putting in a little work instead of taking everything at face value.

 

This is not to say that mobs of people will actually do the due. But it is, as I said, illuminating.

[1a2b3cppp 10]

ET phone home - never heard of it.

 

is that where we would find...

1a2b3c.....

"This system can be backtested, and I've been posting 100% of my trades with live calls for years (something other people who share systems never do)."

 

if this has all been said and done before elsewhere are we just going to be mean reverting?

or is it all just random in which case who cares?

and why move to TL - is it because we are such noooice people.

 

I suppose if you want to call it "mean reverting" that's fine. I wasn't looking at mean reversion models when I was figuring out how I wanted to trade, though.

 

There are fewer people here who try to convince me that because Fibonacci sequences may be found in nature that that is therefore proof that they apply to trading.

 

And the discussion here is different. I'm always trying to learn and improve and chat with other people who can contribute new ideas. And I want to contribute ideas of my own rather than just take from other people.

[BlueHorseshoe 10]

thats why i dont think there is a lot of randomness about the system. It seems simply based on what goes down usually goes back up. The entires, exits and direction of trade are not random, nor is there any real relevat debate about if the data is random...thats all.

 

The implication seemed to be that price was random. The system isn't random, or it wouldn't be a system. Although I've no idea what the system is - buy a market that is going through a tough patch? How tough?

 

Re Backtesting - yes. same old story if you can hang onto a lot of different things, or diversify enough. That is why i am interested in the criteria for when something is considered a bad trade. What happens if you buy at the wrong levels and get stuck never exiting as it never retraces enough. same old story....

 

At the absolute worst, you lose all the money in your trading account. Currently about 3% of my money is in my trading account. So it wouldn't be a huge deal to lose it (that's a lie - I'd cry myself to sleep, but for all the wrong reasons . . . ). The point is - the whole approach being described seems to require serious de-leveraging.

 

If the "system" is good, then a "bad" trade is surely one that is outside the system; if the system is poor then maybe it's just any trade that loses . . . But I get your point - nobody with an average hold time of 5 days wants to be stuck two years waiting for a 50% drawdown trade to rebound to break even or better . . .

 

As far as exit criteria - no market yet, as far as I am aware, plumetted to zero without a single pullback on which to exit (at a better price than the prior low). If parabolic up/down moves like this were common and sustained then trend followers would clean up more regularly than their performance figures indicate that they do.

I'm not sure that the OP will do much to sway anyone (or that he'she won't try to sell something sooner or later), but there are ideas there that I think are both true, and worthy of further consideration.

 

BlueHorseshoe

[BlueHorseshoe 10]

TLers used to be fairly rigorous in their due diligence, key words being "used to be".

 

Compare your typical comments along the lines of "most people here don't really trade" and "if you haven't worked it out after a few months then give it up", with your comment above. How long does due diligence take, exactly?

 

BlueHorseshoe

[BlueHorseshoe 10]

Blue,

 

Bernanke did not make central bank purchases in the market. He did buy treasuries and MBS which had the hopeful impact of forcing money into the markets, which would increase the equity of publicly traded companies, which would allow them to borrow more at lower rates to invest in plants and factories. My Bernanke market support statement is a matter of speaking.

 

I am brilliant when I have a winning trade.The market went in the wrong direction when I lose.I am not a level headed zen master who is indifferent to wins or losses. I wouldn't do anything that I didn't get a charge from.

 

The truth is that I have a healthy respect for the elements that are not in my control. Luck is one of them.

 

I don't know who Bernanke is, to be honest. He must control some element of fiscal policy in the US - someone at the Fed or the Treasury? Is he Alan Greenspan's successor? I'm not sure . . .

 

Economics ain't my forte.

 

So "Bernanke" is just a name, and you used it to reference conveniently the entire global financial system . . . But it's not a good substitution . . .

 

Bernanke did not step in to support the entire global financial system . . .

 

. . . has a very different ring to . . .

 

The entire global financial system did not step in to support the entire global financial system . . .

 

Sorry if I'm sounding petty, but like the OP, I labour under the assumption that viable trading strategies will survive most economic turbulence, but not complete failure of the financial system. Maybe it's needlessly pedantic to quibble over this.

 

BlueHorseshoe

[SIUYA 11]

yes Blue there is definately value in many ideas.....

so long as the truth of all the pros and cons associated with those ideas are evaluated.

 

As for an instrument not going to zero - it does not need to go to zero, or does it need to actually rebound at some stage off its low - it needs to be able to rebound sufficiently off the traders average prices of entry to make it worth while.....and to do so sufficiently to make it a better system than simply buying and holding over a long period of time and collecting dividiends, option premium or capital gains and not much else.....all the while ensuring the trader does not do the same as in other systems - ie meddle.

 

Is the system robust, replicable by anyone and have better than alternative risk reward returns (more from a funds pov than a 2:1 type of analysis) or even buy and hold - which by the way as a system with a few modifications also works in some markets.

 

DBP - the due dilligence on TL members is that a requirement??? seems scarier than BB watching.....wouldnt the best due dilligence of ideas be to be 'found out' on multiple forums.....unless there are ulterior motives....and in this anonymous world....surely most personalities can be easily reinvented......plus we cant forget that there are always people wanting to be departed from their money.

[1a2b3cppp 10]

I'm not trying to say this is the best system in the world, only that it's the only way I know how to trade because I cannot predict price.

 

I don't feel comfortable with buy and hold because while you can make a lot of money in bullish situations, what happens if all your money is invested and the market crashes? Since I cannot predict price, I don't know when a crash is coming.

 

In big bull runs I don't make as much as other people who have all their money invested (ie. not sitting in cash), but that's not my goal. My goal was to come up with a consistently profitable method of trading that I am comfortable doing, and to improve it as I go.

 

I'm also fascinated with the idea of being long and short at the same time. I know a lot of people say that's the same thing as having a flat position, or equivalent of being only long or short by a lesser number of contracts (for example, if you are long 2 ES and short 1, that's the same as being long 1 ES).

 

I wanted to come up with an intraday system that was long and short at the same time, averaging down on the losers, possibly pyramiding the winners, and exiting during net profit or when both are in profit, but there's always the possibility that price may just go in a straight line in one direction and you end up with a big loser on the averaging down side (slightly offset by the winning side). Because I cannot predict price, I never am sure if that is going to happen or not, so it seems quite risky. Perhaps hedging with options or something. I don't know. But if you hedge with options you run the risk of price going nowhere and losing money on your options, and then after they expire price takes off in one direction without retracing and you lose even more money. And since price is random, that could happen at any time.

 

It can be confusing to think how a long and short position could both be profitable at the same time, so here is an image to illustrate:

 

 

It wouldn't depend on predicting price, but you'd be subject to giant trends that could potentially cause you to have to exit for a loss. So then you come up with hard questions like what range do you trade in, where do you set your hard loss, etc. I don't have the ability to analyze the market to come up with reasonable answers to those questions.

 

And of course, you don't have to wait until both positions are positive to exit, you just have to wait until you're net positive. In fact, in that example, the further price goes up to the average short price, the more net positive you will be because your long position is bigger than your short position. So if this is the ES, you're long 14 contracts and short 6 which means each tick upward is $100 ($175 - $75).

 

Of course, you have no idea when price is going to go back down and force you to keep adding to your long position, so you need to exit periodically.

 

There are other variants that involve averaging down on both sides as price goes against you and closing them out periodically. The goal isn't to exit at the optimal place on each position; the goal is to consistently make money and price goes up and down.

Edited April 25, 2013 by 1a2b3cppp

[1a2b3cppp 10]

When I hedge my long SPY positions with SH, sometimes price immediately goes back the other way and I end up making less than I would had I not hedged with SH. But it's not about that, it's about using proper position sizing such that I make money over time and not closing your position while both are negative.

 

Have a look at the final stats I posted for the trade on the first page. There were two profitable closed out SH positions and one that was currently open and negative when I closed out the trade. But the net for the trade was profit. Some people might say "why did you have that SH position open? You were losing money on it. You would've made more money if you did not have it open." And that's correct. But at the time, I had no idea if price was going to keep going down or if it was going to go up. If it went down I may have closed out my SH position for a profit like I did the first two times. But since price went back up that time, I still closed out the trade for a net gain.

 

I won't average into a short position as it goes against me because I don't know how high the market can go and I don't want to be short with unlimited upside. Until I find a way to remedy this, I only average down into long positions and I use appropriate position sizing in the hedges to ensure that it never gets away from me even if price rallies.

[rplust 10]

 

It can be confusing to think how a long and short position could both be profitable at the same time, so here is an image to illustrate:

 

 

 

No, it's not confusing at all. But your sample is like a roller-coaster movie with a happy ending. What if it continues the way it started and every time you enter a short you double the buys. If you stick with one short and one buy you'd have already 3 profitable trades and there'd be no need of averaging, just go on till you get bored....lol Makes no sense to me. If you guessed the right direction and you are profitable on the trade, why would you enter double the order (or any other multiple) against the profitable trade. Anyway, I acknowledge that this is up to you.

Actually I wanted to address another issue. I see that posters here are confused. You say you don't trade on margin but use cash i.e. you buy for example shares directly or use options as your main trading tools (I don't suggest these are the only trading tools). Some posters seem to confuse margin with leverage.

So it would be great if you'd explain a little the tools you use. I know that trading options allows me to make money most of the time even the trade goes against my original order.

It's like buying an insurance policy. But you have to stick with the original order size. No double, triple... I personally favour options trading over anything else.

It would be great if you addressed this issue a bit.

[1a2b3cppp 10]

No, it's not confusing at all. But your sample is like a roller-coaster movie with a happy ending. What if it continues the way it started and every time you enter a short you double the buys. If you stick with one short and one buy you'd have already 3 profitable trades and there'd be no need of averaging, just go on till you get bored....lol Makes no sense to me. If you guessed the right direction and you are profitable on the trade, why would you enter double the order (or any other multiple) against the profitable trade. Anyway, I acknowledge that this is up to you.

 

I have no idea how long the trade will be profitable. In this example, trading both sides allows you to be profitable regardless of where price goes. The total profit (long + short) is also greater than if you only had the shorts. Remember, price is random and can reverse randomly.

 

Of course, if you begin with a short, and price goes in your favor and you don't want to add a long position, that's up to you.

 

Actually I wanted to address another issue. I see that posters here are confused. You say you don't trade on margin but use cash i.e. you buy for example shares directly or use options as your main trading tools (I don't suggest these are the only trading tools). Some posters seem to confuse margin with leverage.

So it would be great if you'd explain a little the tools you use.

 

I'm not sure what you mean by "tools." Do you mean the things I trade? In that case, I use stocks 99% of the time and options and stocks together about 1% of the time.

 

When I say I don't use margin it's because I'm not using margin. I will never get a margin call.

 

Using leveraged instruments (SSO, for example) is not using margin as long as you don't buy more than you can afford. If you have $10,000 in your account and buy $10,000 worth of SSO, you're not using margin. It's only margin if you're using the money the broker loans you to expand your buying power.

 

I know that trading options allows me to make money most of the time even the trade goes against my original order.

It's like buying an insurance policy. But you have to stick with the original order size. No double, triple... I personally favour options trading over anything else.

It would be great if you addressed this issue a bit.

 

The only thing I've done with options is writing covered calls. I have considered selling puts for future purchases (for example, say my next order to buy SPY was 600 shares @ $140, selling 6 $140 SPY puts would bring in some cash for shares I was going to buy anyway). However, I have not done this for two reasons:

 

1) I use Scottrade and they don't allow selling puts even with their option agreement. They said I have to go to OptionsFirst if I want to do that.

 

2) This strategy doesn't guarantee I will get the shares. For example, if price dips down below my buy price but then goes back above it at expiration, I wouldn't end up with the shares. Not getting the shares at the price I wanted may mean that my average cost doesn't get lowered enough for the trade to be profitable. To use the above example, if I wanted 600 shares of SPY at $140, I need to make sure I get them if price hits $140, not that I will get them only if price closes at or below $140 on a specific day. In other words, if I use a limit order, I'll get the shares if price goes down that low even for one day, but if I sell puts I might not.

Edited April 26, 2013 by 1a2b3cppp

[ericcse 10]

Hi 1a sir,

My previous post was delayed (as a new member) so not sure if you saw it.

I am very interested in seeing how you calculate/control the risk in your system.

I had spent a lot of time analyzing a similar system, the biggest problem I had was finding an optimal ranges to add to losers --

small ranges = higher exposure to risk, as you need to average down more often. The drawdown can grow very quickly in a strong trend.

To address this problem, we can use longer ranges or have a bigger account, however both come with prices. longer ranges means we are missing the smaller moves (small chops), and it goes against our original goal of making small profit as the market moves. Bigger accounts would simply decrease our ROI.

 

So I believe finding the right ranges for the account size is critical here. Really love to see you share an example on how u calculate the ranges in relation to the account size.

 

Also, I am not sure why you would consider yourself having open positions on both directions, is it just for the sake of easy analysis? I analyze it with positions in one direction only, hedging would then just means covering some of my losing positions.

[rplust 10]

QUOTE[i have no idea how long the trade will be profitable. In this example, trading both sides allows you to be profitable regardless of where price goes.]

 

I'm sorry, I can't follow your logic. In your example the price is going South. You have 4 contracts in the direction of the price and 14 contracts against it. And you tell me this allows you to be profitable regardless where the price goes!?

According to my math your loss is at 3.5 times higher than your gain. In your example you created a happy ending. But in reality, if the price continues going South (and it may do this for months and years) I'm curious, how does that allow you to be profitable?:hmmmm:

[ed_inacloud 10]

1a, as I've said before I agree with most of what you say (including mixed long and short positions) but the diagram you show doesn't make much sense to me. I can relate to the the averaging in on the long side but the combination is confusing, if you had the 1st short then why would anyone put in a counter position rather than closing the 1st? Also if we could identify any one of those shorts positions then we'd be sitting in the Carribean now (unless you are of course ).

 

I'd be interest to know how you would actually trade that chart, personnaly if I'd taken the 1st long as the opening then I would average in to improve my opening and possibly taken a counter short position on the break of a previous low (but closed that in place of opening a further long).

[clmacdougall 11]

Perhaps hedging with options or something. I don't know. But if you hedge with options you run the risk of price going nowhere and losing money on your options, and then after they expire price takes off in one direction without retracing and you lose even more money.

 

You don't hedge through buying an option, you hedge by writing an option. This makes up for stagnation. When price goes nowhere, you reap the benefits as the option writer.

[ed_inacloud 10]

Re mean reversion and random - exactly my point - the system is mean reverting and hence not random - and also has other limitations based on various intrument criteria...thats why i dont think there is a lot of randomness about the system. It seems simply based on what goes down usually goes back up. The entires, exits and direction of trade are not random, nor is there any real relevat debate about if the data is random...thats all.

 

So is the suggestion that someting that is random is not mean reverting? Random behaviour is normally associated with binary events (mean reverting around zero) and mean reversion to values. A bar on a chart comprises both.

 

As soon as you take a postion then you set your own zero level, your decision before that is up or down ie binary. Thats the random bit. Averaging in resets the zero level which improves the chance of get back to BE but increase risk of greater loss.

 

It's a Normal distribution curve, there will be outliers / black swan events that will cause great pain on occasion.

[SIUYA 11]

So is the suggestion that someting that is random is not mean reverting? Random behaviour is normally associated with binary events (mean reverting around zero) and mean reversion to values. A bar on a chart comprises both.

 

As soon as you take a postion then you set your own zero level, your decision before that is up or down ie binary. Thats the random bit. Averaging in resets the zero level which improves the chance of get back to BE but increase risk of greater loss.

 

It's a Normal distribution curve, there will be outliers / black swan events that will cause great pain on occasion.

 

No - i see where my poor writing can indicate that( i should have simply said randomness has nothing to do with this....the system is mean reverting and randonmess is not relevant as to if the system will work) as the point is this.

 

Randomness is a red herring in this whole system....(and this shows how the pros and cons and reality of a system can be diverted to some stupid theoretical argument.)

 

The basis of this whole strategy does not rely on the markets being random. It relies on the basis of what goes down should go back up.....there is nothing random about that, and if you are making decisions to go long or short on other factors then these are not random decisions.

This is an active v passive management choice and about trying to beat a market by not necessarily timing it.

 

As to another red herring - the accounting. Pure accounting trickery - that is all.

Unless you have a hedge in a completely separate instrument for some advantageous reason this is exactly the same as trading the same position in a single instrument but taking profits or losses on it. Don’t be fooled by the accountants – they have already ruined the world for us!

Your previous post point this out.....its like the other delusion people seem to have when it comes to say - oh that loss it ok i have not crystalised it and therefore i have not really had a loss.....:doh:

[SIUYA 11]

Perhaps hedging with options or something. I don't know. But if you hedge with options you run the risk of price going nowhere and losing money on your options, and then after they expire price takes off in one direction without retracing and you lose even more money.

 

You don't hedge through buying an option, you hedge by writing an option. This makes up for stagnation. When price goes nowhere, you reap the benefits as the option writer.

 

I would trade against you any day if you think writing an option is a good hedge.

Depends on what you are hedging against....

the opposite is true - writing options over an underlying is not a great hedge as you only have a hedge for the amount of premium you get...its not really a hedge at all if you think in terms of insurance. Buying the option should at least properly hedge the underlying instrument.

If you wish to collect premium by writing options, then you would be hard pressed to call this a hedge. Its more a yield enhancer/average price reducer/ take profit mechanism.....

 

If you think of hedging as an insurance policy, then would you only write a partial hedge to collect premiums over say your own house in case it burns down?

 

Writing options is not a hedge it is an offset....of cost if you own the underlying.

Buying options hedges - at a cost of the premium.

 

Once you buy or sell an option over an instument you simply change the risk and reward profile, and so it depends entirely on what you want and as to what you are trying to hedge. Plenty have been blown up because they wrote options thinking they have been hedged.

 

I dont know if this is too off topic and another red herrring...probably is.

[DbPhoenix 42]

No - i see where my poor writing can indicate that( i should have simply said randomness has nothing to do with this....the system is mean reverting and randonmess is not relevant as to if the system will work) as the point is this. . . .

 

I would trade against you any day if you think writing an option is a good hedge. . . .

 

Too bad we no longer have Post of the Month. Or, in this case, Posts.

[1a2b3cppp 10]

Hi 1a sir,

My previous post was delayed (as a new member) so not sure if you saw it.

 

Hi. I missed it originally but just went back and read it. I did notice however that one of my posts which was previously at the bottom of a page was now at the top of the next page, so that must've happened when your post got approved.

 

I am very interested in seeing how you calculate/control the risk in your system.

 

The main risk control method is not using margin. If you use margin you run the risk of blowing your account (or getting a margin call and having to either deposit more money or close your positions at a loss).

 

I had spent a lot of time analyzing a similar system, the biggest problem I had was finding an optimal ranges to add to losers --

small ranges = higher exposure to risk, as you need to average down more often. The drawdown can grow very quickly in a strong trend.

To address this problem, we can use longer ranges or have a bigger account, however both come with prices. longer ranges means we are missing the smaller moves (small chops), and it goes against our original goal of making small profit as the market moves. Bigger accounts would simply decrease our ROI.

 

You've identified two problems with a system like this. As I said, this isn't the greatest system in the world, it's just the only way I can trade that works for me.

 

What I've been doing for the last few years is using Fibonacci retracements after a decent SPY rally. Of course, Fibonacci retracements are just certain levels, you can really use any and have the similar results. The only reason I used Fibonaccis is I wanted to use something most people were familiar with.

 

Technically, you don't even have to start after a pullback. You can enter whenever you want. I just prefer to wait until a pullback because it gets me a better initial price. The downside of doing that is that sometimes you miss rallies if you're waiting for price to retrace and it never does. Of course, I cannot predict price so I don't know when there's going to be a rally vs when price is going to reverse as soon as I enter, so psychologically I like to wait for pullbacks.

 

As far as when to add and how much to add, one way is to just pick the lowest level you think price will get to and divide up your positions. The safest way is to use 0, but this limits your potential profit. For example, if you decide that you don't think SPY will go below 50, so you add your final position using the reminder of the cash in your account (no margin) when SPY hits 50, and then it drops to 40, you cannot add anymore, and your average cost will remain higher. But if it doesn't go below 50 and then begins going back up, you'll make more money than if you had picked 0 as the lowest level it could go to, because in that case you'd have a smaller position since you were waiting for SPY to drop even lower.

 

Also, I am not sure why you would consider yourself having open positions on both directions, is it just for the sake of easy analysis? I analyze it with positions in one direction only, hedging would then just means covering some of my losing positions.

 

Let me distinguish between the two examples here:

 

1) when I hedge against SPY with SH, it's so I can (potentially) make some extra money if price keeps going against me. Some people will say "but you could just sell off some of your SPY shares and it would be the same thing." This is incorrect. Bigger SPY position = bigger dividends.

 

2) the example chart I posted above was just an idea for an intraday system, not how I trade long term. In that situation, the reason I go long and short at the same time is because the net gain is bigger that way. Let's look at the possibilities:

 

a) I only do the short side and price goes my way. Cool. But I don't know how long price is going to go in my direction because I cannot predict price.

 

b) I only do the short side and price goes my way. I add to my winning position because I heard that's a good strategy. I don't know how long price will go in my direction because I cannot predict price. Oh no! Price just reversed and now my winner is a loser because I added to a winning position and worsened my average price!

 

c) I go short and then start adding longs as price goes down. One of three things will happen:

 

1) eventually price will reverse and go back up so quickly that it turns my short position into a loss but the long positions I've been accumulating more than make up for it

 

2) price will reverse more slowly and I can close out both positions in the profit (such as in the example chart I posted)

 

3) price will keep going down forever and eventually get to the point where I cannot add anymore longs because averaging down with ES contracts requires a huge account. That is why I do not trade this system in real life. (This risk could possibly be lessened with options or with statistical calculations about how far the ES tends to range, but all it would take is one crazy day to blow through your statistics. And adding options to the mix as a hedge introduces another variable, time, and basically just changes the situation in which you take a big loss)

 

Anyway, that's the reason for going long and short at the same time. I fully expect people to still tell me it's wrong or whatever. But nothing says they have to trade this way.

 

There are a few more ideas for simultaneous long/short positions but I don't want to derail this thread any further.

 

If it is still confusing, think of the long and the short positions as two separate positions with two separate goals rather than trying to combine them into one position in your mind. Imagine you and your friend are trading in the same office and you're only allowed to go long and he's only allowed to go short. Think about how you can both profit in the same market with different strategies at the same time. Think about what it would look like if you looked at your positions at individual points in time. Yes, at a specific point in time 2 long + 1 short = net 1 long, but in the big picture it's not necessarily the same.

[1a2b3cppp 10]

QUOTE[i have no idea how long the trade will be profitable. In this example, trading both sides allows you to be profitable regardless of where price goes.]

 

I'm sorry, I can't follow your logic. In your example the price is going South. You have 4 contracts in the direction of the price and 14 contracts against it. And you tell me this allows you to be profitable regardless where the price goes!?

According to my math your loss is at 3.5 times higher than your gain. In your example you created a happy ending. But in reality, if the price continues going South (and it may do this for months and years) I'm curious, how does that allow you to be profitable?:hmmmm:

 

That example I posted was just an idea for an intraday trading system and not how I actually trade for exactly the reason you mentioned (and the reason I elaborated on near the end of my previous post). It can keep going against you forever, or at least for longer than my account can take. Averaging down intraday with the ES requires a huge account.

 

Now on a daily timeframe it's different. I can divide up my account so that I can keep adding as SPY goes lower and lower. But I can't do that for the ES intraday because it would require too much money.

[1a2b3cppp 10]

1a, as I've said before I agree with most of what you say (including mixed long and short positions) but the diagram you show doesn't make much sense to me. I can relate to the the averaging in on the long side but the combination is confusing, if you had the 1st short then why would anyone put in a counter position rather than closing the 1st? Also if we could identify any one of those shorts positions then we'd be sitting in the Carribean now (unless you are of course ).

 

I'd be interest to know how you would actually trade that chart, personnaly if I'd taken the 1st long as the opening then I would average in to improve my opening and possibly taken a counter short position on the break of a previous low (but closed that in place of opening a further long).

 

It was just an example to show how both short and long positions can be profitable at the same time.

 

You might not add long positions if the initial short is going in your direction. Assume you went long first and the market immediately started going against you. Or, assume you went short and long at the same time, planning on averaging down the side that goes against you and pyramiding up on the side going in your favor. As soon as price goes in the opposite direction, you make money on both sides.

 

I do not actually trade this system intraday, it was just an example.

 

And yeah, if we could identify those short positions then I wouldn't need to trade as if price was random because I would just take big positions in the correct direction and make money

[1a2b3cppp 10]

You don't hedge through buying an option, you hedge by writing an option. This makes up for stagnation. When price goes nowhere, you reap the benefits as the option writer.

 

You hedge by buying an option so that if price goes completely against you you don't lose everything.

 

Like if you buy 200 shares of XYZ @ $Y and buy two puts with a strike price less than $Y.

 

Unless you mean hedging against price going nowhere.

[1a2b3cppp 10]

So is the suggestion that someting that is random is not mean reverting? Random behaviour is normally associated with binary events (mean reverting around zero) and mean reversion to values. A bar on a chart comprises both.

 

As soon as you take a postion then you set your own zero level, your decision before that is up or down ie binary. Thats the random bit. Averaging in resets the zero level which improves the chance of get back to BE but increase risk of greater loss.

 

It's a Normal distribution curve, there will be outliers / black swan events that will cause great pain on occasion.

 

You guys can call it mean reverting if you want. I don't care.

 

I used the term "random" because price is random and I don't know where it's going. When choosing a profit target I'm not basing it on some mean calculation.

 

I'm basically making a bet that price will go back up before it gets to 0. I'm sure it's reverting to a mean somewhere in the process, I just don't think about it like that.

[1a2b3cppp 10]

The basis of this whole strategy does not rely on the markets being random. It relies on the basis of what goes down should go back up.....there is nothing random about that

 

Sure it is. Look at the chart I posted in my other thread:

 

 

That was created with a random generator.

 

The only reason price isn't COMPLETELY random is because it can't go below zero.

 

Price movement is random. Is SPY going to go up/down or sideways in the next minute/hour/day. I have no idea. It's random. Oh look, we're in an uptrend. Is it going to keep going up in a minute or an hour or a day? I have no idea. It's random. It might reverse now. It might reverse on Monday. It might reverse and then reverse again. I have no idea. And neither does anyone else.

 

That's what I mean by random.

 

It might not actually be, but as long as I cannot predict direction, I will treat it as if it is random.

[bleph 10]

A Review of The Great Deformation by John Butler

 

As is consistently the case throughout the book, however, Stockman highlights the links between failed economic policies and their unfortunate social consequences: The relentless growth of moral hazard and crony capitalism. Once Volker had left the stage, replaced by Alan ‘Bubbles’ Greenspan (sic), he explains how the Fed began to de facto target asset prices, in particular the stock and housing markets, and that “Under the Fed’s new prosperity management regime…the buildup of wealth did not require sacrifice or deferred consumption. Instead, it would be obtained from a perpetual windfall of capital gains arising from the financial casinos.” Wow.

 

That’s right, for decades the stock market has been a financial casino, rigged as desired by the Fed to (mis)manage the economy, and now all that is left is a “bull market culture” that has “totally deformed the free market.”

 

Stockman also points out how the decades leading up to 2008 were replete with ‘foreshocks’ of the eventual financial earthquake. For example, there was the S&L crisis of the late-1980s and early 1990s. There was the Long-Term-Capital debacle. And each and every time that the Fed’s economic management led, either directly or not, to near-calamity, the bailout beneficiaries were enriched anew.

 

With most of Stockman’s criticism is directed at Washington, Wall Street and the Fed, he nevertheless reserves some for the non-financial corporate sector. As he explains:

 

Alongside the Fed’s cheap credit regime, there arose a noxious distortion of the tax code best summarized as ‘leveraged inside buildup’. The linchpin was successive legislative reductions of the tax rate on capital gains that resulted in a wide gap between high rates on ordinary income and negligible taxes on capital gains. This huge tax wedge became a powerful incentive to rearrange capital structures so that ordinary income could be converted into capital gains.

 

"Bernanke" is not a "floor". It is the current name, in a succession of names, that has been slid into a slot next to a door...well, a curtain (as in, "pay no attention to that man behind the curtain...").