[czl]

Essential reading for all prospective traders is Taleb's "Fooled by Randomness."

Markets are full of feedback loops, so you can't expect the same results with "paper" backtesting or "paper" forward testing as with real trades, especially in larger amounts.

With such paper testing you can discover and fool yourself with amazing high-probability, high-earning strategies that come with the hidden surprise of low probability catastrophic losses.

For example, many naive gamblers think that a strategy with a 45% chance to win, combined with betting to cover losses, will nearly always succeed because the odds of losing ten times in a row seem low. However, when the inevitable 11th loss occurs, it can be devastating.

[mmarian]

I haven't read Taleb's book. But wouldn't the logic you employ apply to any strategy?

eg I could also say that you could fool yourself believing that investing in the S&P 500 index is a strategy with high-probability of performing well, with a hidden surprise of low-prob cat losses.

[czl]

> But wouldn't the logic you employ apply to any strategy?

You ask a good question.

Consider a game like rock-paper-scissors. The goal is to predict your opponent's move. Among all possible strategies, the random strategy is unique because it can't be predicted. Any other strategy can be anticipated by a smarter opponent. Being random means you can't lose to a smarter opponent.

In trading, buying low and selling high requires prediction. Any strategy that relies on prediction becomes predictable to smarter opponents. Buy-and-hold index investing is the only strategy immune to this exploitation because you're effectively betting on everything. With passive index investing, your investments grow at the rate of business growth, making this strategy special.

[mmarian]

I agree that competitors could outsmart you. But that's just like in any other kind of business. Doesn't mean entrepreneurs should give up trying to start a business.

And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.

[czl]

Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade.

This dynamic is similar to gambling games like Texas Hold'em poker in a casino setting. While skilled players may consistently profit at the expense of less experienced participants, the overall wealth within the game remains constant. No new value is generated; instead, existing wealth is redistributed among the players based on their relative performance and luck. When research time and fees are added trading is largely “negative sum”.

NOTE: Some trading activities, such as market making and arbitrage, provide liquidity and help maintain fair pricing in financial markets but these operations require expensive low latency market access and are dominated by market insiders and are not possible for retail traders.

[mmarian]

While I do believe it provides liquidity in all cases, let's just focus on the zero-sum aspect. My response is - so what if it's a zero sum game? Why should someone care if that's the case? It's not as if all startups out there add value to the world.

[czl]

> It’s not as if all startups out there add value

There is a fundamental difference between startups and "buy low, sell high" trading. Even if only a minority of startups succeed, they can create significant value for society by introducing innovative products, services, or technologies. In contrast, even if the majority of traders were "successful," there would be no net value created, as one trader's gain is another's loss, and the overall wealth in the system remains unchanged.

> so what if it’s a zero sum game?

While you may not initially be concerned about the distinction between positive-sum and zero-sum activities in society, studying history and economics may change your perspective. Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading, do not.

> why should someone care?

Consider this analogy: if "buy low, sell high" trading is like playing chess, and your opponents are a collection of the best chess engines money can buy, operated by the world's top experts (think Magnus Carlsen), how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader. Some professional traders pay brokers to have retail orders routed to them for this reason much like how professional poker players want to play amateurs for their income.

While a small fraction of professional traders manage to beat the returns of buy-and-hold index investing, the fleeting existence of market-beating strategies is not a valid reason for the average investor to attempt them. Just as you cannot predict which lottery tickets will be winners, you cannot foresee which trading strategies will outperform. If this was possible highly paid professional traders that devote their life to it would be able to do it but only a few actually do and luck plays a big role in their success.

Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.

[czl]

> I never claimed that my strategy beats the sp500. It has underperformed, especially the way the market has been. The market has returned 25% over the last year.

After two years of research, you have developed a trading strategy that, compared to the S&P 500, "has underperformed, especially the way the market has been"? If your strategy depends on buying / selling it will trigger taxes each time this happens, yes? Short term gains taxes? When people switch from sp500 to your strategy how much less will then earn over a decade? Yet you claim your strategy "works"?

> The expected performance of the strategy is somewhere between 10% and 30%, but it is not clear what exactly.

If a profitable pattern exists, what makes you think nobody else has found it and that it will continue to exist in the future? Is it because few look for these profitable patterns? Are they poorly funded? Do they lack incentives to do it?

> I don't think it's necessarily fair to call others "dumb money". They can hold for longer and still profit with the market.

"Dumb money" refers to hobby traders who believe stock trading will make them rich. Some rely on gut feelings, while others use advice from astrology or technical analysis. Why do you suppose professional traders pay for order flow from such traders?

> The market is not a zero sum game because the market capitalization is several multiples of the total invested funds. The market is a money printer in its own way.

For every trade, there is a counterparty on the other side, and your gain is their loss and vice versa. This makes trading a zero-sum activity. Furthermore, for every trade, there are middlemen who charge fees, making trading a negative-sum activity.

Long-term buying and holding is positive-sum investing and does not require a trading strategy or searching for profitable patterns.

> Precious metals as a currency do not work because the government doesn't have the freedom to mint an unlimited supply of hard assets.

The purpose of a currency is to facilitate transactions and maintain stable prices in the short term while losing value in the long term to discourage hoarding. Gold cannot achieve this because the amount of gold cannot be adjusted to match the size of the economy as it grows or shrinks. When the economy grows, using gold as money will cause it to stall because people will save up gold as it becomes more valuable instead of spending it. Deflationary currencies like gold are detrimental to economic growth, which is why modern countries no longer use them.

> The government holds a gun to people's heads, locking them up if they don't use the highly inflationary national currencies.

Are you surprised by inflation? Saving your wealth using a currency does not make sense since it is designed to lose value over time.

If you prefer precious metals, what prevents you from keeping your wealth in gold (a negative-sum asset) and converting it to fiat currency only when needed?

> Countries are run by politicians, bureaucrats, and armed police mafia who care about their paycheck and pensions which wouldn't be so big if not for free moneyprinting at the expense of the citizenry. The people do not have freedom of their choice of money.

Countries are "owned" by their voters. Government debts are your debts. Inflation is just another tax like other taxes. If you are dissatisfied with the current situation, get involved to change it.

[mmarian]

Not sure what you're replying to, that wasn't the question I asked.

[czl]

HN had an error during saving and when I attempted again I picked the wrong message and can not change or delete it now. I will add an extra answer later.

[OutOfHere]

This is true, but traders like me chase it anyway, refining the strategy at each failure. If there is no refinement possible, then the trades should stop.

[czl]

> refining the strategy at each failure

You make it sound like you are improving yet with all traders like you "chasing it anyway, refining the strategy at each failure" what exactly are you improving? When you play a game like "rock paper scissors" what refinement is possible?

Due to market feedback loops the patterns you look for profits are transient. When they do persist do you ever wonder about them being like fake "tells" in poker that lure you to bet big setting you up to be smashed later?

High frequency trading / front running information and arbitrage may be profitable but require low latency costly access.

Apart for that my impression is that technical analysis based short term trading (as opposed to long term investing) is on net a negative sum activity. Like a game of "rock paper scissors" there is nothing to improve.

[OutOfHere]

I don't view it as RPS. I view it a bit as a game of chess. Whether it is a net positive or net negative, time will tell. I am not claiming success. Those who are so mentally closed off that they will downvote any differing opinion without understanding it will never succeed with it.

[czl]

> I view it a bit as a game of chess.

Given the possible winnings and bad players lose their chips to good ones and retire what skill level do you suppose is on the other side of this game? Given this you still play?

> Whether it is a net positive or net negative, time will tell.

For you "time will tell" because evidence from rational thinking and the experience of countless others is not enough?

> Those who are so mentally closed off that they will downvote any differing opinion without understanding it will never succeed with it.

Hence I am not voting but asking questions trying to understand your "differing opinion". You view the activity as a game of chess. I view it as an effort to construct a perpetual motion machine. What matters is the money and time wasted on what is known not to be possible. What matters is why someone who seems intelligent fails to understand this. Perhaps they do and so actually have a different plan than building a perpetual motion machine. Maybe they are building an audience of those who believe in perpetual motion machines?

> I am not claiming success.

Yet you or at least the author of the article seem to believe if they stick with this "research" they will be successful? How long till they claim to have success and, for a price, offer to share the benefits of their success with you?

[OutOfHere]

You wouldn't want to confuse my cautiousness with failure. My system works, but:

(1) It doesn't beat the market on green market days or overall. Given how the market has been since October 2023, you'd do a lot better by just holding an ETF.

(2) It does make money on red market days too.

(3) Overall it does earn and is successful, but I express caution because I think that at least four consecutive years of success is necessary before labeling a strategy successful. I haven't run it for that long.

(4) I keep doing experiments, several of which turn out to be failures, although I have done enough of them already, and I'd like to move on to something else now.

(5) I don't see the future, but I adapt to it. I cannot promise you that this will always work, that it won't blow up.

> Given the possible winnings and bad players lose their chips to good ones and retire what skill level do you suppose is on the other side of this game?

There are all levels of skills and of time horizons. Those with bad skills either quit or adapt. Others just have to hold for longer to see profit.

> I view it as an effort to construct a perpetual motion machine.

The reason why the market is viewable from the perspective of a perpetual motion machine is due to excessive federal moneyprinting shaking things up. If not for it, if dollars were backed 1:1 by hard assets like gold, I think it'd be a lot calmer.

> How long till they claim to have success

It took me a year to come up with a strategy that looked to work, but another year to simplify it to the bare essentials and to decrease risk where I could.

Being open-minded, faithful, and steadfast are essential prerequisites to discovery. If you mind is already made up, that would make you like everyone else.

[czl]

> My system works, but: (1) It doesn't beat the market on green market days or overall. Given how the market has been since October 2023, you'd do a lot better by just holding an ETF. (2) It does make money on red market days too (3) Overall it does earn and is successful, but I express caution because I think that at least four consecutive years of success is necessary before labeling a strategy successful. I haven't run it for that long.

You discovered a trading strategy that beats sp500 index fund as long as you know ahead of time if the market will be red vs green?

> There are all levels of skills and of time horizons. Those with bad skills either quit or adapt.

With losses forcing out dumb money the other side of a typical trade will be parties that tend to win their trades. Are you "paying for order flow" to trade against dumb money?

> The reason why the market is viewable from the perspective of a perpetual motion machine is due to excessive federal moneyprinting shaking things up. If not for it, if dollars were backed 1:1 by hard assets like gold, I think it'd be a lot calmer.

I do not view the market as a perpetual motion machine. I view market beating strategies as a perpetual motion machine. Federal money printing changes the unit of account so there appears to be asset price inflation but unless you are holding the currency nothing really changes just size if the stick being used to measure things. Precious metals as a currency do not work which why they are no longer used for that purpose. If they did work better you would see successful counties continue to use them not abandon them.

[AnimalMuppet]

> The reason why the market is viewable from the perspective of a perpetual motion machine is due to excessive federal moneyprinting shaking things up. If not for it, if dollars were backed 1:1 by hard assets like gold, I think it'd be a lot calmer.

The Panic of 1873, the Panic of 1893, and the Panic of 1907 would like a word.

We tried dollars directly convertible to gold. The result was not calm markets.