ahhaha,
In a translating market the return is biased, so you should earn at the average rate which is approximately the translation slope. This is independent of decision method used to enter or exit. Entering and exiting yields a lower return than simply holding. You have to make the a priori assumption that the trend will persist for any trading decision procedure to be effective, but the procedure reduces the return through the friction of entry and exit. If you have to make the assumption you might as well hold because it yields more or realizes the translation more efficiently.
All other market regimes are too randomized to expect anything but a more rapid loss rate. The deterioration of your capital and the ruination rate of a group of traders are adequately modelled by radioactive decay:
dn/dt = -a*n
where n is units of money or number of traders busted.
If I may translate some of this into terms that might be more comfortable to some of the readers here, what you are saying is the market over a long period of time has been going up. People who buy and hold can expect to participate in the market growth and enjoy the average rate of return. People who try to improve on that rate by taking advantage of the excursions away from the average rate (i.e., buy low and sell high) will necessarily diminish their returns, sooner or later, and ultimately go bust.
You throw in a little calculus to "prove" it, but don't follow through with the implication of that derivative you use to model this inevitable failure. The calculus says that over any finite period of time a fixed percentage of the number of traders, or their assets will "decay" as a result of the mechanism that causes them to fail or lose their money (trading). You assert that because the rate is now 85% (per year?, per all the people who have tried in the last 10?), it will always be 85% until there simply are no more traders. I assume it is this formula you have used to project the 2 and 3 year failure rate you have quoted in another message to Dave Osterfeld; the numbers fit. Do you have any empirical data for this projection?
There are at least a few things your model does not account for.
1) The trader population, and their assets were not fixed at the beginning of the experiment, as they are in an isolated radioactive sample. There is an infusion of new traders and new money that might well keep n constant or growing for some time to come.
2) Your formula, even if correct, applies only to the ensemble of entities you represent by n, and only to a large enough sample. You might use it to support your contention that the 85% bust rate will prevail, but you can never use it to say to any one trader "You will fail within 3 years (or 5 years or 10 years, or even in your lifetime)" anymore than you can use it to predict when any particular radioactive nucleus in a sample will decay.
3) When the sample gets small, or you look at it in a small enough time frame, the number of "busts" (decays) in any time period no longer follows the uniform distribution you have used. It becomes something quite different where there are intervals of relatively high decay, and intervals with none at all. An influx of "new n" might cause the population to increase at times, and higher than average decay may diminish it at times, but on the average it could stay about the same.
4) You completely discount the fact that some people are better at this than others, and that with survival and experience it is possible to improve your odds of continued survival. In other words, you are contending that it is all just dumb luck with everybody on the same footing. Not all the nuclei in this sample are the same. There are different personalities, different temperaments, differences in ability to control the emotions of fear and greed and differences in the ability to read the market, or a segment of it.
You are dismissing the question that was asked of you in the message to which you reply by turning it into a forum to expound your prophecy of doom. It was simple question. The poster did not assume he could get out with no loss in the 50% of cases where his decision proved wrong, only that the loss taken could be kept smaller than the gains he could make when he is correct.
When you sell by trading decision you lose your position and chase something else. Repeating this activity makes you hostage to the a priori expectation which is negative. How do you know it is negative? The statistics show the majority of traders over the last several years have been losers. The bust rate is about 85% which is lower than in previous decades, but the variance is higher. The trend has made the bust rate slower, the characteristic is smaller, and so squanders people's lives more insidiously.
I happen to agree with your assertion, or at least the implication that overtrading is counter productive. At the very least there are costs associated with every trade that diminish your gains or increase your losses, and when that becomes a significant factor, as it does with scalping for teenies and eighths, it decreases your probability of profitably. The average "trader" would be far better off working on improving entry points and staying with stocks that are enjoying a short term "translation" in the preferred direction than trading many times a day, and many of us are learning to do it. Instead of telling us how our failure is inevitable, why not try to model the optimum holding time based on the statistical deviations of the components of this thing we call "the market". I'll bet you could prove that holding longer is better, but I'd also beet that holding time is a lot shorter than your current model predicts.
One last point. You claim the bust rate has slowed because the characteristic is smaller, and that because of "the trend". What trend? Are you telling us the average rate of return in the market is rising? I don't think so. Is it the average rate of return of the stocks people are trading? If so, doesn't that mean these people are finding the best opportunities for a favorable outcome. Sort of sounds like they know something doesn't it? Or maybe you just mean the characteristic is getting smaller, because it is the trend (inverse of it, whatever) and the bust rate is declining because traders are getting more savvy, more are surviving, more are improving their returns.
There is a much simpler model. The average return from the market is relatively constant over a long period of time. If you choose, you can buy an index fund and take what the market brings. If everyone did it, the market would stagnate, but companies would grow and increase their profits and everyone would own undervalued stock. Instead, people can choose to divert their money into new ventures, or move their money around accepting some risk for the chance of a greater gain (greedy patzers, whatever that means). More of them will fail than will succeed. Those who succeed will enjoy higher rates of return. Those who get really good at it may get rich and greed may get the best of them someday, and they will go bust. Others will get good at it and maintain a risk reward scenario that allows them to reap above average returns indefinitely.
You can model all you want, but unless you stay here for a very long time you will not refute this simple model.
I will not post again on this subject. I've added my $.02 and now I'm going to spend my time becoming one of the survivors living on the higher return side of the distribution curve.
Dan |
