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Are random trading strategies more successful than technical ones?

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Re: Are random trading strategies more successful than technical ones?

#31

Post by tptacek »

stouset wrote: post #22
rubyn00bie wrote: post #17

Prices are pretty well modeled using Brownian motion. Most economists should know this while almost no one in the normal population will be aware of it. Sometimes people are just lucky, but overall the more trades you make the more you'll converge on the average return rate. I would also like to note, that predicting price is different from predicting an overall increase in the value of the underlying security. https…

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

For retail traders, isn't it overwhelmingly likely that you're just going to trade with the inventory of a market-neutral internalizer?

Re: Are random trading strategies more successful than technical ones?

#32

Post by veeenu »

veeenu wrote: post #28
cschmidt wrote: post #6

This reminds me a bit of a classic paper called "1/N". It compared a portfolio of putting equal money into each security, vs a bunch of fancier approaches. The 1/N almost always won. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=911512

This is widely known among practitioners, but there is a caveat -- a 1/N portfolio bears a much higher risk than, say, a cap-weighted portfolio or a risk-parity asset allocation. A 1/N portfolio receives an equal contribution in terms of volatility from each asset, meaning that very risky assets significantly increase the portfolio's volatility, while not necessarily contributing proportionally better returns, due to…

Addendum: the paper actually mentions the Sharpe ratio, which is a general, popular measure of risk adjusted returns, but which fails to take into account the non-normality of the distribution of returns; so, while my previous comment may be incorrect in a Gaussian world, I would be curious to see the results when the performances are evaluated under the assumption of fat tailed processes, which I presume would paint a very different picture.

Re: Are random trading strategies more successful than technical ones?

#33

Post by alisonkisk »

tptacek wrote: post #31
stouset wrote: post #22

Earlier quoted context omitted.

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

For retail traders, isn't it overwhelmingly likely that you're just going to trade with the inventory of a market-neutral internalizer?

The market maker chooses a price based on the offers in the book.

Re: Are random trading strategies more successful than technical ones?

#34

Post by gruez »

tptacek wrote: post #31
stouset wrote: post #22

Earlier quoted context omitted.

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

For retail traders, isn't it overwhelmingly likely that you're just going to trade with the inventory of a market-neutral internalizer?

It's not either-or. You're right you're mostly trading with a market internalizer, which is pocketing the spread (ie. bid: 10.00, ask: 10.05) but isn't really making money on price movements. However, you're still against hedge funds/banks for medium/long term price movements (eg. you buying a stock after they pumped it, and selling after they dumped it).

Re: Are random trading strategies more successful than technical ones?

#35

Post by alisonkisk »

JustFinishedBSG wrote: post #18
habibur wrote: post #10

Doesn't the conclusion indirectly also indicate that day trading is a zero sum game? If the answer is yes, then the only way you can make money from day trading is from commissions you earn performing day trade on behalf of other parties with money.

This is a misunderstanding of zero-sums games. Zero-sums game are actually proven to have a winning strategy. Chess is a zero sum game.

Not true at all.

A simple loser-pays-winner bet is zero-sum regardless of how the winner is determined.

Re: Are random trading strategies more successful than technical ones?

#36

Post by hbrav »

tptacek wrote: post #31
stouset wrote: post #22

Earlier quoted context omitted.

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

For retail traders, isn't it overwhelmingly likely that you're just going to trade with the inventory of a market-neutral internalizer?

Yeh. It would be more accurate to say something like this:

A retail trader will usually be trading with some sort of market maker. That market maker will also trade with informed traders, and sets their bid-offer spread accordingly to offset this adverse selection. So the retail trader is paying a bid-offer spread that is the result of other informed traders in the market.

Of course, as a retail investor you may have access to a broker (e.g. Robinhood) that tries to exclude informed traders so it can set a lower spread.

Re: Are random trading strategies more successful than technical ones?

#37

Post by awb »

stouset wrote: post #22
rubyn00bie wrote: post #17

Prices are pretty well modeled using Brownian motion. Most economists should know this while almost no one in the normal population will be aware of it. Sometimes people are just lucky, but overall the more trades you make the more you'll converge on the average return rate. I would also like to note, that predicting price is different from predicting an overall increase in the value of the underlying security. https…

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

I don’t think that’s quite right. Otherwise, you could just follow the opposite of your unprofessional trade strategy as a cheap proxy for a professional trading strategy.

I think the market is dominated by front-running trades and randomness.

Re: Are random trading strategies more successful than technical ones?

#38

Post by timmytokyo »

gumby wrote: post #12

Sadly, the abstract doesn’t include the result, so here it is so you can decide if you want to read more: > Our main result, which is independent of the market considered, is that standard trading strategies and their algorithms, based on the past history of the time series, although have occasionally the chance to be successful inside small temporal windows, on a large temporal scale perform on average not better th…

What a ridiculously formulated sentence.

Re: Are random trading strategies more successful than technical ones?

#39

Post by ipaddr »

myownpetard wrote: post #29
paulpauper wrote: post #5

>Recently Taleb has brilliantly discussed in his successful books [15], [16] how chance and black swans rule our life, but also economy and financial market behavior beyond our personal and rational expectations or control. Actually, randomness enters in our everyday life although we hardly recognize it. Therefore, even without being skeptic as much as Taleb, one could easily claim that we often misunderstand phenome…

When investing in something like the FAANG index or Google you're not betting on how the companies will do. Predictions like "Google is going to do well in the future and continue to grow" are not useful for making investments. You're making a bet that Google will do better than everyone else thinks it will. And even more than that. You're betting that it will do so by a wider margin and/or with a higher likelihood t…

You are betting more money will come in from new investors or more money from existing shareholders. You are betting people won't sell.

You are not betting on what will think in the future because market forces are bigger than will.

Re: Are random trading strategies more successful than technical ones?

#40

Post by hbrav »

na85 wrote: post #8
paulpauper wrote: post #5

>Recently Taleb has brilliantly discussed in his successful books [15], [16] how chance and black swans rule our life, but also economy and financial market behavior beyond our personal and rational expectations or control. Actually, randomness enters in our everyday life although we hardly recognize it. Therefore, even without being skeptic as much as Taleb, one could easily claim that we often misunderstand phenome…

>but the FAANG index in which each company is worth at least $100 billion has pretty much beaten everything else since 2009. The companies that have seen the largest growth, amid the longest bull market in history, have beaten everything else? Isn't that pretty much a tautology?

In this context it's usually called "survivorship bias".
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