Are random trading strategies more successful than technical ones? • Hacker News Board

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

#71

Post by Kranar » Wed, Sep 29, 2021, 11:17 PM UTC

GuB-42 wrote: post #62

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.…

Can you elaborate on what you mean by trading is a zero-sum game on a small scale? Without clarification that statement could be used to justify any conclusion.

Are you saying that someone who trades a small amount of capital is always winning an amount of money that is roughly equal (+/-) what the counterparty lost or vice-versa? That can be demonstrated to be untrue.

Are you saying that trades spanning a short period of time always win or lose an amount that sums up to zero for all participants? That also seems highly unlikely unless all participants are engaged in short term trading which is not true in practice.

At any rate, while I've heard this claim repeated often, I've never heard anyone substantiate it and as far as I can tell it doesn't really make sense.

There are financial instruments that are zero-sum by their nature with respect to dollars, for example derivatives and currencies are by nature zero sum with respect to dollars, although they are not zero sum if you factor in risk. But that has nothing to do with short vs. long term though. Equities are not zero-sum, long term or short term.

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

#72

Post by RhysU » Wed, Sep 29, 2021, 11:22 PM UTC

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".

Taking into account trading costs, a meh strategy and its inverse can both lose money.

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

#73

Post by inter_netuser » Thu, Sep 30, 2021, 1:28 AM UTC

veeenu wrote: post #42

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…

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.

This is absolutely correct

If the markets were efficient and equivalent to random brownian motion, Jim Simons wouldn't be producing 50%+ returns for decades non-stop in HFT.

His net worth is 25 billion dollars, and there are other countless billionaires, made from the "efficient" markets.

That's how much this fallacy is worth.

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

#74

Post by medvezhenok » Thu, Sep 30, 2021, 1:47 AM UTC

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…

The reason that risk is important to quantify is because leverage could be used (in theory), to achieve risk parity between different strategies. So ideally you would pick the one that has the best risk adjusted returns (with enough diversification) and then leverage it to the amount of risk you would be comfortable with.

As a highly simplified, unrealistic example - let's say strategy A has an average return of 5%/year with max drawdown of 20%, and strategy B has an average return of 10%/year with a max drawdown of 50% (here max drawdown being a highly simplified proxy for risk). Theoretically, you could use leverage to go 2.5X long strategy A to achieve a return of 12.5%/year with a max drawdown of 50% (minus cost of the leverage - depending on how you do this, cost could be fairly small). This might do better, risk-adjusted, than just doing strategy B by itself.

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

#75

Post by medvezhenok » Thu, Sep 30, 2021, 1:52 AM UTC

anthony_r wrote: post #41

Win % is a really useless metric in this business, try computing win % for something like long vol strategies (for example things like what Taleb did back in the day), it might come out to 5% or lower and still make money. And because every trade has a counterparty there's plenty of strategies that win 95% or more of the time but eventually lead to ruin. Returns pretty much never have a symmetric distribution. Comput…

Yeah - Martingale strategy is a good example of high win % strategy that doesn't work (unless you have infinite money)

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

#76

Post by bluGill » Thu, Sep 30, 2021, 2:15 AM UTC

bumby wrote: post #68

bluGill wrote: post #19

Earlier quoted context omitted.

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?

Pretty much. When you trade any amount of money your trade is changing the market.

In some less honest markets there are even cases where what the numbers say you can trade isn't possible because those offering the deal won't follow through, or will let a friend in ahead of you