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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?

#61

Post by veeenu »

jcrben wrote: post #56
veeenu wrote: post #42

Earlier quoted context omitted.

The assumptions underlying Brownian motion of prices have been disputed for quite a while now: the normality hypothesis can be rejected on most if not all historical financial returns series, as it turns out that most returns are actually fat tailed processes with very significant (and variable over time) correlations between distinct assets, which makes research around portfolio theory even harder to conduct.

Depends on your timeframe right? Shorter time periods are a bit more random. But there's also clearly some autocorrelation which makes sense given the inflationary / deflationary expectations at play

Yes, definitely. The big issue there is that intraday intervals vs daily closes vs monthly prices all require very different kinds of analyses and features as they target different scales of behavior. For example, you could exploit order book models for intraday which make little sense for longer time frames. In the same way, portfolio theory on intraday intervals tends to not hold as well as it does on longer timeframes.

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

#62

Post by GuB-42 »

If trading is a zero-sum game, which it is on a small scale, then random strategies are bound to be in the middle of the pack.

It is like rock-paper-scissors. A random player will win 50% of their games regardless of the other player strategy. When two non-random players play, one will successfully predict the other player moves and win more than 50% of the time, the other will fail and win less than 50% of the time.

So the ranking will always be 1. winning strategies 2. random 3. losing strategies, with as many winners as there are losers, and any number of randoms. So, random is more successful than half of the technical strategies.

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

#63

Post by blitzar »

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…

Stonks always go up. /s

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

#64

Post by gumby »

timmytokyo wrote: post #38
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.

TBF the four authors have names that appear to be Italian and German. They acknowledge the contribution of someone who provided DAX data (German stock index, like the CAC or Dow). And lots of subordinate clauses are common in written German, or at least a lot more common than in English.

So while I agree the sentence is rather contorted, there is a sympathetic explanation. Especially as the authors claim no institutional affiliations.

I don’t think such a sentence would be justified coming from an institution in an English-speaking country.

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

#65

Post by stouset »

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?

There are market-maker intermediaries in between but structurally you're playing the game primarily against professional finance teams with massive amounts of research, automation, and up-to-the-microsecond information you don't have access to who are the ones actually setting the price.

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

#66

Post by stouset »

dandelany wrote: post #59
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.

Meanwhile in the Theranos thread next door… “What just amazed me is how gullible all the investors were, and how they didn't do due diligence, hire outside experts, or anything. Weird.” Financial professionals do dumb things, sometimes en masse , and I think there are still some opportunities to make money if you have a good nose for BS/mass delusions. However, the problem with this strategy is, as Keynes put it: “Th…

It's also very easy to convince yourself that you have particular insight that those other people lack. You might even occasionally be right. But generally speaking the odds are that they understand something you don't, not the other way around.

Specifically to your Theranos point, Theranos was never public. Conning individual investors out of private investment money is somewhat different since the people who saw through the bullshit don't have an easy way of profiting off of that sense. The options were to buy in or opt out, and plenty of investors wisely decided to opt out but there was no play for them to profit off of the collapse.

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

#67

Post by greg7gkb »

OnlineGladiator wrote: post #43
veeenu wrote: post #28

Earlier quoted context omitted.

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…

> This way, 1/N ends up performing very poorly on a risk-adjusted basis while undoubtedly at the same time outperforming any other kind of allocation on the basis of return alone. I fear I'm misunderstanding you. Are you saying despite having higher returns, the higher risk makes this strategy worse? That really feels like handwaving to me, since the only thing I care about is ROI. I understand nonlinearity and how i…

I think another way to characterize 'riskiness' is the volatility of a portfolio, IOW how much does it swing up and down over time. So everything else being equal, two funds with the same ROI may still have different levels of volatility, with the fund having the lower volatility being more desirable.

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

#68

Post by bumby »

bluGill wrote: post #19
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.

No. First they ran in simulation, not the real market. It may be that that act of being in the market changes the market enough to make your strategy work. (though typically it is the opposite - things work in simulation but applying them to the market makes them not work). As such this paper doesn't really tell us anything useful. Even if we ignore the above, they only tested a few different strategies. That says no…

>things work in simulation but applying them to the market makes them not work

Can you elaborate? Is this because large flows of money eventually become the market? Insinuating that some strategies only work at low trade volume?

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

#69

Post by Kranar »

simorley wrote: post #60
Kranar wrote: post #51

Earlier quoted context omitted.

OPs claim is poorly stated. He's referring to Zermelo's theorem which states that a finite game with two players that's deterministic and zero sum with perfect information and no possibility of a draw must have a winning strategy. It's not difficult to prove that this must be true and you likely can intuit why it's true (imagine building a decision tree for such a game). But all of those qualifiers I mentioned are ne…

> In chess, it's possible to end the game in a draw, so Zermelo's theorem does not apply to it and OPs claim is wrong about chess. Isn't it even assumed that a perfect game of chess is a draw. Once chess is solved, it'll be all draws.

Yes it's an open question. The prevailing opinion is that a perfect game ends in a draw as you said, with a minority opinion that white can force a win. I am not aware of any credible opinion that black can force a win.

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

#70

Post by hollerith »

initplus wrote: post #45
awb wrote: post #37

Earlier quoted context omitted.

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.

This reasoning doesn't work because the market isn't a sequence of discrete binary choices. If the "opposite" of a bad strategy was a good one anyone could have great returns by designing some obviously terrible money losing strategy then doing the "opposite".

Right, and even if the market was a sequence of discrete binary choices, bad traders will make many bad binary choices, but many of their choices will be good ones. (They just won't know which are bad and which are good.)

In other words, reversing every choice in a mediocre sequence of binary choices yields another mediocre sequence of choices.

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