Is Trading Just a Sort of Gambling?

[zdo 20]

If he read this thread, what would Taleb say ?

 

 

 

Pullling us back on topic a little bit, I think it's worth repeating (for only a few maybe)

It's better to see gambling as a form of trading than to see trading as a form of gambling...

[SIUYA 11]

  MightyMouse said:

Siuya, it is relevant. You need to plan for the existence of good and bad luck. Most trading plans that I see are designed to have bad luck take advantage of them. Yet they are not designed to take advantage of good luck. In other words, a lot of trading plans are designed with a flaw. So, the unsuspecting trader who trades his flawed plan with discipline will eventually fail even though he is trading what seems to him to be an iron clad plan.

 

But you are correct about separating luck and skill and recognizing it.

 

MM

 

MM, while you read more into my point that was intended, you do raise a very very good point and I agree with you. In many ordinary business plans they are called contingencies etc. and even then they are often too optimistic, a common flaw for any business.

Read Outliers by Malcom Gladwell, it has an interesting take on luck and being in the right place right time, among other things.

[DylKay 10]

I'm a great believer in [B]luck[/b] and I find the harder I work, the more I have of it.

 

Luck is what happens when preparation meets opportunity. Elmer Letterman

 

Luck is a dividend of sweat. The more you sweat the luckier you get. Roy A. Kroc

 

The harder I practice, the luckier I get. Gary Player

 

The meeting of preparation with opportunity generates the offspring we call luck."

 

Do you believe in luck? Of course how else would I explain the success of the (other) people that I hate.

 

Depend on the rabbit's foot if you will, but remember it didn't work for the rabbit. ~R. E. Shay

[jackb 10]

MM,

 

I'm pretty sure I know the context in which your comments have been couched. For those detractors of yours, I think they don't take kindly to being disabused of the fact that one's intellect and hard work aren't quite as important/relevant as they may want to believe. A little humility on their part might be nice. A good way for that to happen is to let someone else make the case. Someone who does a great job with this is Cal Tech's Leonard Mlodinow, in his book The Drunkard's Walk. Don't want to buy the book, here's a link to an excellent online presentation he made at the Perimeter Institute: View Past Public Lectures - Perimeter Institute for Theoretical Physics

 

The best take away from his book/lecture is "The rat wins." Once you understand that in the context of trading, it's easy to be humble about bringing one's intellect to bear on the market.

 

Gladwell's Outliers, as another poster mentioned, is also apropos.

[MightyMouse 12]

  jackb said:

MM,

 

I'm pretty sure I know the context in which your comments have been couched. For those detractors of yours, I think they don't take kindly to being disabused of the fact that one's intellect and hard work aren't quite as important/relevant as they may want to believe. A little humility on their part might be nice. A good way for that to happen is to let someone else make the case. Someone who does a great job with this is Cal Tech's Leonard Mlodinow, in his book The Drunkard's Walk. Don't want to buy the book, here's a link to an excellent online presentation he made at the Perimeter Institute: View Past Public Lectures - Perimeter Institute for Theoretical Physics

 

The best take away from his book/lecture is "The rat wins." Once you understand that in the context of trading, it's easy to be humble about bringing one's intellect to bear on the market.

 

Gladwell's Outliers, as another poster mentioned, is also apropos.

 

Jackb,

 

I agree. It is a bit disturbing and deflating to the ego to be presented with this possibility. However, growth frequently does come with pain.

 

MM

[Cory2679 11]

I think it would be an interesting study to find a person (or a group of people) that were proven successful chart readers/traders (probably a fairly difficult task!) and have them trade a chart of randomly generated upticks and downticks for a period of time and see they how they did relative to their usual performance...

 

Anyone know if this has actually already been done?

[SIUYA 11]

  jackb said:

MM,

 

For those detractors of yours, I think they don't take kindly to being disabused of the fact that one's intellect and hard work aren't quite as important/relevant as they may want to believe. A little humility on their part might be nice.

 

This is an often interesting point, that for me actually delves into so much of trading, finance and actually almost everything we do.

The idea that Rande Howell is putting up in another thread, about fear.....is also related.

Even TRO (the rumpled one ) and the Rat

The fact we think through careful planning that we can eliminate bad luck.

Isn't that the whole definition of luck. That it can be good or bad and cant be planned for, but ideally the plan can only minimise the devastation from bad luck, and maximise the opportunity from good luck.

History is littered with people - but lets focus on the finance world, who thought luck was irrelevant.

For some reason LTCM always comes to mind.

Its even related to the often quoted - put 100 lawyers/doctors/professionals in the room and tell them half of the room is below average intelligence for the room and watch the disbelief that everyone has.

 

Hell...., imagine being a farmer and planting half a million dollars in the ground and crossing your fingers the weather holds out and the timing is good. Off course it will, 100million years or so of constant repetitive seasons suggests it will, HOWEVER, making it economically viable to do so is an entirely different matter.

Does that make the farmer a gambler or a trader?

[Cory2679 11]

  jackb said:

...Cal Tech's Leonard Mlodinow, in his book The Drunkard's Walk. Don't want to buy the book, here's a link to an excellent online presentation he made at the Perimeter Institute: View Past Public Lectures - Perimeter Institute for Theoretical Physics

 

I just watched this video and enjoyed it/would recommend it. I tend to agree that people, in general, don't give randomness enough credit.

 

However, I'm of the opinion that it's also naive to go to the other extreme and attribute virtually everything to randomness/"luck." I think there's a balance...it's important not to totally discount knowledge and understanding, talent, skill, preparation, sweat and hard work, etc.

 

While it's interesting to compare a group of people flipping coins to investors, sports teams, etc., it's not the same thing. Investors, athletes, etc. are not flipping coins! They're not participating in something with a random outcome (unless, of course, you subscribe to the random walk hypothesis, which I do not). While sure, "luck" plays a role, so does talent, skill, and so on (perhaps equally or more so).

 

One of many examples he gives is a sports team not improving once the coach is replaced...suggesting that their winning streak (which had been struck) was just a result of randomness/luck in the first place. However, to me, just as viable (or more viable) an explanation could be that something has indeed changed (psychological and/or physical) that has interrupted the winning streak...and simply replacing the coach isn't a magic fix.

 

Of course, you can't "prove" it either way...it's just theory...all you can prove is that if such and such things were random, you could get similar results. That doesn't prove that said things are random.

 

All I'm suggesting is that it's not one extreme or the other. I think elements of both are true. It's not black and white...it's a grey area...as is virtually everything.

 

[Kiwi 16]

You are onto it Cory.

 

Getting the probabilistically possible win (=luck) is most important in a game where you get few opportunities for it to apply. So, one big element of luck (taking the job from the guys who turned out to be Intel not from the guys who were Hewlett Packard) can make a huge impact on everything downstream.

 

But we are not in that kind of game. I don't know about you but I get between 10 and 15 trade opportunities per week from my market. Every week. So I would have to be lucky over and over again for it to make a big difference (which is statistically improbable but, just, possible). In this kind of game luck will even out and thus skill in strategy development and adaptation plus skill in professional execution will be the deciding factors.

 

People give examples of large firms (as in the recent meltdown) and the likes of ltcm as "proof" of luck but what you find when you look at the situations is that they adapted to a type of situation and then bet very big on its continuation. As a result when the markets did their natural changes, for a variety of reasons, they either didn't or couldn't adapt fast enough and got caught out.

 

That's why, as professional traders, we execute money management and awareness of market evolution (and revolution) so that our financial accumulation isn't outweighed by the inevitable periods of draw down. Its not about "luck"; its about managing ones risk in a stochastically influenced environment that changes over time.

[MightyMouse 12]

  Cory2679 said:

I just watched this video and enjoyed it/would recommend it. I tend to agree that people, in general, don't give randomness enough credit.

 

However, I'm of the opinion that it's also naive to go to the other extreme and attribute virtually everything to randomness/"luck." I think there's a balance...it's important not to totally discount knowledge and understanding, talent, skill, preparation, sweat and hard work, etc.

 

While it's interesting to compare a group of people flipping coins to investors, sports teams, etc., it's not the same thing. Investors, athletes, etc. are not flipping coins! They're not participating in something with a random outcome (unless, of course, you subscribe to the random walk hypothesis, which I do not). While sure, "luck" plays a role, so does talent, skill, and so on (perhaps equally or more so).

 

One of many examples he gives is a sports team not improving once the coach is replaced...suggesting that their winning streak (which had been struck) was just a result of randomness/luck in the first place. However, to me, just as viable (or more viable) an explanation could be that something has indeed changed (psychological and/or physical) that has interrupted the winning streak...and simply replacing the coach isn't a magic fix.

 

Of course, you can't "prove" it either way...it's just theory...all you can prove is that if such and such things were random, you could get similar results. That doesn't prove that said things are random.

 

All I'm suggesting is that it's not one extreme or the other. I think elements of both are true. It's not black and white...it's a grey area...as is virtually everything.

 

Cory,

 

He isn't attributing everything to randomness. If you recall in the example where they were trying to duplicate joe dimaggio's results in a simulation. Each players stats were weighed and then "flipped". It wasn't just that they took an equal number of players for that period of time and gave them a 50/50 assignment of heads or tails. If the player was a strong hitter, he was more likely to get heads, say, than another player.The results made perfect sense and can be applied to the real world and to trading. You could possibly do the same with strong and weak traders, though it is harder to measure if someone is a strong or weak trader.

 

 

 

MM

[jackb 10]

  Cory2679 said:

I just watched this video and enjoyed it/would recommend it. I tend to agree that people, in general, don't give randomness enough credit.

 

However, I'm of the opinion that it's also naive to go to the other extreme and attribute virtually everything to randomness/"luck." I think there's a balance...it's important not to totally discount knowledge and understanding, talent, skill, preparation, sweat and hard work, etc.

 

While it's interesting to compare a group of people flipping coins to investors, sports teams, etc., it's not the same thing. Investors, athletes, etc. are not flipping coins! They're not participating in something with a random outcome (unless, of course, you subscribe to the random walk hypothesis, which I do not). While sure, "luck" plays a role, so does talent, skill, and so on (perhaps equally or more so).

 

One of many examples he gives is a sports team not improving once the coach is replaced...suggesting that their winning streak (which had been struck) was just a result of randomness/luck in the first place. However, to me, just as viable (or more viable) an explanation could be that something has indeed changed (psychological and/or physical) that has interrupted the winning streak...and simply replacing the coach isn't a magic fix.

 

Of course, you can't "prove" it either way...it's just theory...all you can prove is that if such and such things were random, you could get similar results. That doesn't prove that said things are random.

 

All I'm suggesting is that it's not one extreme or the other. I think elements of both are true. It's not black and white...it's a grey area...as is virtually everything.

 

 

Cory,

 

I forgot to mention the other big take away from Mlodinow. As you saw on the video, the story of Bill "Money Mag's Greatest Investor of the '90s" Miller, is a must-know for any trader. Beating the SP500 in 15 consecutive years was a statistical given. But that doesn't make for a good story and most would rather be told (believe) it was due to utter brilliance. Of course, there were plenty of spec traders in the 90's beating the SP year after year buoyed more by a trending upmarket than anything else. Now that Miller is a perennial under-performer...well, maybe if we don't talk about it, maybe it won't need to be incorporated into one's trading outlook. To his credit, Miller comments on his streak that "maybe it's not 100% luck—maybe 95% luck." I remember reading about an analysis that addressed this exact topic (outperforming the SP), and it concluded that a money manager needs to have something like 20-25 years of consecutive out-performance before a definitive statement could be made that it was something other than luck. The relevant point is that few have achieved that and the likelihood that they are posting on this forum are minuscule. Now, there may be some members here that have out-performed the last 10-12 years in a row and it may seem sad to them that they still need another 10-12 years before they can attribute it all to their hard work, discipline, patience, sophisticated position sizing scheme and exquisite trend-following (or S-R or volatility expansion) prowess. It's a cold, hard fact. And for some, it's just too much to deal with. For them, their conditioning to random rewards will ultimately catch up to them...that is, unless they're....you've got it....lucky.

 

P.S. There's another PI presentation that you might enjoy (and relevant to trading)...Jeff Rosenthal's Curious World of Probabilities.

 

P.P.S. I found the source for the 20-25 year time frame I mentioned above. It's from Larry Harris' book Trading & Exchanges, Chapter 22.

Edited January 22, 2011 by jackb

[Arthur 10]

well trading may be related to gambling in certain cases but its different from gambling. In gambling you won't have fixed strategies and perform swot analysis but here you do. You cannot gamble on basis of technical and systematic ground but you can trade on this ground. So there is a gap.

[lightstar 10]

it's like a giant ponzi scheme perpetuated by the gov't and fed bailouts

[gflorko 10]

  Arthur said:

well trading may be related to gambling in certain cases but its different from gambling. In gambling you won't have fixed strategies and perform swot analysis but here you do. You cannot gamble on basis of technical and systematic ground but you can trade on this ground. So there is a gap.

 

If you mean strengths, weaknesses, opportunities and threats, that system could certainly apply to sports betting. Suppose you're betting on a football game. The visiting team's starting QB is out and they haven't won a game on the hosting team's field in five years. Would that not be a strength for the home team and a weakness for the visiting team?

[Tradewinds 12]

I like to use the "loaded dice" analogy. A "loaded" die has a hidden weight in one side. You roll it, and it's more likely to land with the weighted side down; the high number is on the other side. In trading, you can play with "loaded dice". The loaded dice is your knowledge about how the market behaves in certain conditions. If you are a new trader, and you don't know that you can use loaded dice, or you don't have any loaded dice to use, then you are gambling. If you find a pair of loaded dice, or someone gives you some loaded dice, then the game changes from gambling to managing probabilities, and how to place your bet. But even with loaded dice, some people can not manage the probability game, because they don't have faith in the loaded dice. The loaded dice will come up double sixes in your favor more often than not, but if the person rolling the dice can't put their faith in the loaded dice, they place the bet wrong.

 

• If you don't have loaded dice, it's gambling.
  

• Where are you going to get the loaded dice?
  

• Do you think you have loaded dice, but you really don't?
  

• Even if you have loaded dice, do you trust them?
  

• Even if you have loaded dice, and trust them, do you know how to manage the probabilities, and how to place the bet?
  

[Pony 10]

I think in the sense he is talking about, risk and gamble are two different things. Necessities are not even considered gambling in any fashion, sure you could choke, but if you don't eat, you will definitely die. Anyway, let me reiterate something I recently replied on a similar post.

 

If this is a religious problem you have: Jesus surely bought a hammer or two in order to become a carpenter right? Right. That's not a gamble. That was an assessed risk. He could not have had any clients and then he would have been out the time/cost of getting the hammer.

 

Secondly, I don't understand this thing with gambling being a sin, where does it say that? Nowhere. However, it's understandably a bad thing to bet everything you have in order to obtain wealth, something that's frowned upon in the bible (remember the most famous saying of all "It's easier for a camel to go through the eye of a needle than for a rich man to go to heaven") If you enjoy wealth at all, technically you're sinning.

 

If you put an honest amount of effort and time into doing this, it's not gambling, it's taking a risk.