System trading: a nonrandom way to success.
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    Super Moderator Gulfstream's Avatar
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    System trading: a nonrandom way to success.

    In my speech I would like to focus on an issue that can seem abstract, however, I strongly believe that much of the success in trading depends on having the right traders' outlook, on the correct understanding of a number of fundamental issues that show us the limitations that exist in the trading, the opportunities which you can approach.


    Before you start looking for the optimal settings for the system of three overlapping averages, you must have the answers to some fundamental questions. One of them is: May the trader have an advantage in the market and, if so, how stable can it be? In other words, is the success of a trader something natural or accidental? Are we building a castle in the sand or can we build a stable normal business? Well, let’s try to understand.

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    Trading on the stock exchange: Is it a game or business?

    First you need to understand a number of definitions. First of all: what is a game? From my point of view, the key point in the game is the element of luck, or the chance. Here goes my negative attitude to the terms such as "speculators", "stock market game" and “speculation”, because this terminology implicitly encourages people to greater risk, to the game of chance, to a certain fatalism. In contrast, the profits of the business should be logical.

    In business, there must be a process for profit. Thus, the game and the business are kind of antagonists. In one case there is the greater share of good luck, in the other - the result should be natural.

    It’s commonly known that the stock prices can hardly be predicted. However, there are people who claim that they are able to build a strategy directly on the price forecast, but I am pretty skeptical about it. Al though, maybe I'm wrong - in the world there is always a place for miracle. Based on the poor predictability or unpredictability of the future prices, there is an assumption that the stock market game cannot be a business, because it is based on the unpredictable processes. As Isaac

    Newton once said (he lost a fortune on the stock exchange): "I can predict the location of every planet millions of years up to a second from now, but I cannot predict which way this crazy crowd will drive prices next minute ".

    However, if this were so, then the successful trading during long periods of time, as many traders and organizations actually show us, would be impossible. Also, it is impossible to win for a long time in the game of roulette. And usually this fact like the presence of large tracks with positive outcomes is indicated when people want to show that there is a non-random performance, and a professional trader can achieve stable and predictable results. But from my point of view, this is not quite correct, because simply by the law of large numbers something has to happen. I like this parable: "Why is dolphin always pushing a drowning person to shore? Because those who were pushed from the shore could never tell anything to anybody. "

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    Stock exchange is a place where millions of people are trying to find a piece of their own fortune. Millions are trying to achieve it, but we only see those who have come to this. Maybe someone making even incidental gambling can appear among the winners - just by the law of large numbers. Just as if each person of a million throws a coin 100 times, there is a chance that someone gets "heads" 90 times out of 100.

    So, from my point of view, the presence of traders, organizations, which for a long time have a positive result, is not a proof of sustainable advantage of the trader’s existence in the market.

    Also I hardly see a mathematical proof of the existence of such an advantage. I'm not a mathematician and maybe this is why I do not understand something, but I can hardly realize how such evidence might look and actually I have never heard of any. Although, maybe I'm wrong again. Therefore, neither a practice that is usually the criterion of truth, nor mathematics, in this case, does not give us the answer to the question "Does the trader have the natural advantage in the market?" And as we would love to get the answer to that question, and preferably positive, we have to walk this narrow serpentine path of logic which may not sometimes seem perfect, but it suits us and when we trade in the market, this logic makes us feel that we’re walking in the good asphalt road and not on the thin ice.

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    There is a class of games called random strategy: when the winning strategy is based on random events. As an example: well-known backgammon or preference. Obviously, in this case, the game is based on random events, because it is impossible to predict the dice or the card, if no one is cheating. However it is also obvious that the strongest player has a natural advantage. Thus, there are games in which it is possible to build winning strategies even on random events.

    However, this is only possible in those games, which include more than one participant, where there are several strategies, where there is no competition with the unpredictability, but the competition of strategies.

    From my point of view, work on the exchange or trading on the stock exchange is a game based on both random choice and strategy, with an unlimited range of participants. Unlike other games it has a number of features.

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    First, this is the time factor. There is a saying that "there is only one way to win in the stock market - slowly." The natural rhythm of the market is the week, month and year. To determine the winner in the market requires a long period of time, which is psychologically unnatural for people - they want to get results quickly, they want to quickly prove what their worth is, but this haste often fails. You have to understand that the proof of your viability in the market is a very long process that must not be forced.

    The second commonly known feature is that in this game the rules periodically change. The simplest example is on the Russian stock market, we can say even the day when it happened, ironically it was between 31 December 1999 and 1 January 2000, when there was a change in the nature of the market, and the strategies that had been winning - they stayed winning for the most part, but their output quite significantly decreased. Fortunately, these tectonic shifts in the market do not happen often, but we always have to keep them in mind.

    The third, also quite important feature is that we always have to play against the strongest opponent - against the market. In contrast to the preference, we cannot get up and go find yourself the right enemy, here we are trading with the strongest opponent and the result: victory or death. The only way!

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    There is also a number of positive aspects of the game, which I also want to mention. Apparently, the random strategy game has the very large, almost unlimited number of winning strategies. This is probably due to the fact that the market community, this collective mind consists of many different groups, small groups, super-groups, with their behavioral patterns.

    When we develop our strategy, we implicitly choose one of these groups as a sparring partner, against which we play and whose strategic inefficiencies we use in our work. The nice thing is that our sparring partner cannot give up the game. He is forced to play with us. But on the other hand, someone may play against us and we also cannot give it up. By the way, the successful application of counter-strategy against certain groups of participants most likely lies in the changing nature of the market. Some of the participants simply can be "killed" in the market, washed out of the market, not renewed by the influx of new players and from this the nature of the market can vary in some way. If a large group of participants gets "killed", the nature of the market can vary significantly.

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    The most common strategy in the market is the absence of strategies. Therefore, from my point of view, any decent strategies that are used in the market do not compete with each other, they're competing with the main strategy called the lack of strategy. If you take the two right strategies - it's like two wolves hunting for hare, one wolf can be more effective than the other, but as wolves – they do not eat each other, they eat hares.

    Keeping in mind all the above-mentioned features of the random strategy game, let’s consider the effective market strategy in general terms. I would stop at two key aspects: increasing the predictability and achieving sustainability. As I said, the value of future prices are poorly predictable. By the way, do not confuse poor predictability and randomness these are different things.

    Meanwhile, for the construction of any effective strategy in an explicit or implicit form, we need the forecast. Here we have an option: though the prices are predicted poorly, however, there is a number of other indicators derived of prices, which can be predicted much better. This is, for example, the volatility - without doubt it can be predicted much better than prices. If prices are poorly predictable, then volatility forecasts can build effective strategies. And there are quite many such indicators which can be predicted better than the prices.

    And, from my point of view, this is the main way to increase the predictability of our strategies. Now let’s take another important aspect – sustainability.

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    Obviously, we need to research the market in order to find stable patterns. The more stable pattern we find the more stable our system will be. Trying to find such patterns we have to choose any large group that has the inefficiency of its strategy as a sparring partner. The bigger the group will be, the longer it will take for us to "kill" it and this is the best way for us.

    Better yet, if this group will be constantly fed by the arrival of new members from outside. There is nothing more permanent than the eternal human weakness. This is the greed which is inherent in almost all market participants. And at least some of the most stable systems are created with the implicit use of this human weakness - a passion for profit. In fact, we have to look for graphical equivalents of manifestations of human emotions in the market charts.

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    For example, let’s take a psychological behavioral model of the majority of traders, merchants, when the market starts moving from the side to the trend. During the lateral period people get used to the existing prices and they start to seem fair to them. And the price starts to rise. From the traders’ point of view price becomes unreasonably high, and people start to sell. Thus, there is a sale at the beginning of a trend and people get rid of items.

    Similarly, there is a group of people that buy at a market fall. They think that the price was unreasonably low in relation to the price that they got used to during a day or week, and they begin to buy cheaper stocks. If not for these people, we would not have anyone to sell the stock to when we were wishing to leave the falling market, and anyone to buy from when stocks start to rise. I hope that the brokerage industry, including the organizers of this event, will continue to make efforts to "supply" the market with these groups of participants. We wish them great success in this direction.

    In terms of emotions, it may be unpleasant to sell or buy at fall or rise, but no one said that trading is an emotionally pleasant thing, but in terms of money management - it's quite an effective strategy.

    On the basis of those logical preconditions, it is possible, for example, to determine the characteristics of the market on which the trend models should work. Example: it should be the markets with frequent trends and many unprofessional participants. By the unprofessional participants I mean those who trade in the market emotionally, who are unable to control their emotions or do not use any reasonable strategies. From my point of view, the Russian stock market fits both characteristics and this makes me happy, because, as mentioned in one of the definitions of happiness, "Happiness is realizing the validity of your own perspective."


    Michael Korolyuk

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    Quote Originally Posted by Gulfstream View Post
    In my speech I would like to focus on an issue that can seem abstract, however, I strongly believe that much of the success in trading depends on having the right traders' outlook, on the correct understanding of a number of fundamental issues that show us the limitations that exist in the trading, the opportunities which you can approach.


    Before you start looking for the optimal settings for the system of three overlapping averages, you must have the answers to some fundamental questions. One of them is: May the trader have an advantage in the market and, if so, how stable can it be? In other words, is the success of a trader something natural or accidental? Are we building a castle in the sand or can we build a stable normal business? Well, let’s try to understand.
    I think this share has meaning in it ... like building castles in the barren desert so that we can live a normal life in the barren desert ..
    indeed everything seems difficult to live a normal life in the desert, but it would be in the possible when we have determination and a big dream.

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