Fooled: The Role of Randomness

Fooled: The Role of Randomness

(yeah that's a rip off of Nassim Taleb)



I wanted to start a thread, to highlight the role of randomness in the short trading time frame of 1-5 minutes. It's called "Scalping" or in other words, gambling (if you ask me).

Why do so many traders think scalping is profitable? I would assume the 90% failure rate is due to over leveraging and trading in very short time frames. In any market, the bid and ask can spike or drop from a single buyer or seller, especially if it's during low-volume.

Scalping is risky and quite a bit of work compared to trading the larger time frame.
I think the Newbie FX, Futures, or Stock trader should avoid "scalping" at all costs. It will save hundreds to thousands in extra "expenses" and "tuition." Not only is scalping risky, but it doesn't pay to sit at a computer for 5-8 hrs doing 100 trades or more. Why not take less risk, "work" less and capture more points in the trend?

To some extent, the markets are RANDOM! Especially in the shorter time frame (1-5 minutes). It's not hard to move a market...as we all know very well. But is it harder to force a market to trend higher on a daily chart (or even 10 min, 15, 30 or 60)? Yes, because it takes a substantial amount of buy orders to push the market up.

So WHY scalp? I mean, realistically, who is profitable day after day...
Scalping can work if you use excessive leverage I suppose, which is higher risk and it still doesn't capture as many points, pips, or ticks as other methods.

If someone could prove scalping isn't random, I would love to see that (I have seen it work for 1 friend of mine, a rare example of 800% return). And just because we can curve fit a few indicators to data-doesn't mean the price movement isn't random. Scalpers are gambling on a very short time frame.

Watch the charts and decide for yourself.

Mr.J-Arthur said:

Fooled: The Role of Randomness

(yeah that's a rip off of Nassim Taleb)



I wanted to start a thread, to highlight the role of randomness in the short trading time frame of 1-5 minutes. It's called "Scalping" or in other words, gambling (if you ask me).

Why do so many traders think scalping is profitable? I would assume the 90% failure rate is due to over leveraging and trading in very short time frames. In any market, the bid and ask can spike or drop from a single buyer or seller, especially if it's during low-volume.

Scalping is risky and quite a bit of work compared to trading the larger time frame.
I think the Newbie FX, Futures, or Stock trader should avoid "scalping" at all costs. It will save hundreds to thousands in extra "expenses" and "tuition." Not only is scalping risky, but it doesn't pay to sit at a computer for 5-8 hrs doing 100 trades or more. Why not take less risk, "work" less and capture more points in the trend?

To some extent, the markets are RANDOM! Especially in the shorter time frame (1-5 minutes). It's not hard to move a market...as we all know very well. But is it harder to force a market to trend higher on a daily chart (or even 10 min, 15, 30 or 60)? Yes, because it takes a substantial amount of buy orders to push the market up.

So WHY scalp? I mean, realistically, who is profitable day after day...
Scalping can work if you use excessive leverage I suppose, which is higher risk and it still doesn't capture as many points, pips, or ticks as other methods.

If someone could prove scalping isn't random, I would love to see that (I have seen it work for 1 friend of mine, a rare example of 800% return). And just because we can curve fit a few indicators to data-doesn't mean the price movement isn't random. Scalpers are gambling on a very short time frame.

Click to expand...

Firstly I am willing to bet that if I posted 3 charts (if I knew how) one chart on a 1 min TF, 5 min, 30 min, and Hr, you wouldn't be able to tell them apart- assuming I got rid of the scales/prices. Generally the same shapes, patterns, and setups happen on all timeframes.

You show your naivety from your post, take a look at FX Scalpers thread and results this might open you eyes. I am a scalper, i'm not yet in the same league as FXscalper but I am profitable and relatively consistent (iv only had 2 down days this year- touch wood) I don't believe anything random could produce results like that.

And as for your comment on 'the bid or ask price spiking' that is exactly what I look for as my entry trigger, I take advantage of it.

I could raise issue with most if not all of your post, but I have some scalping to do...

Mr.J-Arthur said:

I wanted to start a thread, to highlight the role of randomness in the short trading time frame of 1-5 minutes. It's called "Scalping" or in other words, gambling (if you ask me).

Click to expand...

Remember also that as the duration of the trade increases then so does the probability that fresh market-moving information becomes available, information which isn't a million miles from random itself.

Ben

So we may have 1 profitable scalper in here. Failure of any type of trading is 90% so it will be rare this whole forum is profitable (ESPECIALLY in scalping). I have not been profitable, mainly because the random nature of scalping will suck in new-traders (which I have abandoned long ago)...

It's all gambling, I'm just saying, would you rather gamble on the slightly longer term, or allow the next big seller/buyer to influence your trade?

Yes, I could tell the difference on a candle chart, or even a line chart for that matter...
1 min obviously contains much NOISE.

Let's not call others Naive please =) I'm not calling you names am I? I'm not attacking anyone personally, I'm asking, how many scalpers can admit the short time frames are going to be nearly completely random?

" Remember also that as the duration of the trade increases then so does the probability that fresh market-moving information becomes available, information which isn't a million miles from random itself "

Ben-I don't trade off news, period. It's all in the chart, but most big banks and players know the stuff before (us) the little guy hears about it. Plus markets often do the exact opposite of known information, that's why people lose on their bets...they "over intellectualize" and stay in the trade.

Rosini-I have tried scalping. I find it random mainly. Not only that, it's a lot of work just to get the same amount of points I can get from swinging trends. What is the avg number of pips you pull down (realistically, on avg) and how many trades do you need to do that?

Like, on the eur/usd up move we had a month ago...2000 points up...did you-or any other scalper achieve 2000 points in the matter of a little more than a week? I there are great trends to play and stay in positions...rather than battling intraday 8 hours a day..

Mr.J-Arthur said:

So we may have 1 profitable scalper in here. Failure of any type of trading is 90% so it will be rare this whole forum is profitable (ESPECIALLY in scalping). I have not been profitable, mainly because the random nature of scalping will suck in new-traders (which I have abandoned long ago)...

It's all gambling, I'm just saying, would you rather gamble on the slightly longer term, or allow the next big seller/buyer to influence your trade?

Yes, I could tell the difference on a candle chart, or even a line chart for that matter...
1 min obviously contains much NOISE.

Let's not call others Naive please =) I'm not calling you names am I? I'm not attacking anyone personally, I'm asking, how many scalpers can admit the short time frames are going to be nearly completely random?

" Remember also that as the duration of the trade increases then so does the probability that fresh market-moving information becomes available, information which isn't a million miles from random itself "

Ben-I don't trade off news, period. It's all in the chart, but most big banks and players know the stuff before (us) the little guy hears about it. Plus markets often do the exact opposite of known information, that's why people lose on their bets...they "over intellectualize" and stay in the trade.

Rosini-I have tried scalping. I find it random mainly. Not only that, it's a lot of work just to get the same amount of points I can get from swinging trends. What is the avg number of pips you pull down (realistically, on avg) and how many trades do you need to do that?

Like, on the eur/usd up move we had a month ago...2000 points up...did you-or any other scalper achieve 2000 points in the matter of a little more than a week? I there are great trends to play and stay in positions...rather than battling intraday 8 hours a day..

Click to expand...

Hi J-Arthur,

I cannot argue with the overall logic which you apply in your approach to trading. Of course, there are, theoretically, larger price movements and profits to be found on longer tfs. However, trading longer tfs, usually, involves much higher risk because stop losses have to be wider to allow for short term price fluctuations.

You don't have to be a scalper to enter a trade on a shorter (5min) tf. Some traders, including myself, do not like holding overnight positions. From my point of view, there are enough price movements in a day to justify trading from a 5 min tf. I, could, possibly, make greater profit off a longer tf but, as a GBP/JPY trader, the stop loss requirement would need to be 4-500 pts. The price swings, on this market, at times, can be very extreme. Get it wrong on the 1 hr or 4 hr tf, a few times, and your trading account would suffer quite a bit of damage.

Many months ago a friend of mine, who is a losing trader, pursuaded me to buy a book called "Fooled by Randomness" by Nassim Taleb. This book tries to convince that trading is a choice of heads or tails, where luck plays a huge role. This is a view that I don't share and may explain why my friend is never able to give up his day job and trade full time.

I believe that a structured methodology and good risk management is the key to profitibility (even off a 5 min tf)

Mr.J-Arthur said:

Like, on the eur/usd up move we had a month ago...2000 points up...did you-or any other scalper achieve 2000 points in the matter of a little more than a week? I there are great trends to play and stay in positions...rather than battling intraday 8 hours a day..

Click to expand...

It's all relative. What has the size of the move got to do with anything? Its all about the making a profitable trade. It's pure mathematics. A scalper could have taken 50 to 100 bites out of the 2000 point move. While a position trader might have taken 1. Who is gambling the most? Trading is all about probability isn't it? Capturing profit on say 40 out of 50 bites of the 2000 point move has dramatically less risk and higher probability of profit than attempting to do it with 1 position.

I've read Fooled by Randomness written by Nassim Nicholas Taleb. Personally I think all serious traders should read it. Its good to get a different perspective... and trust me Nassim is a real contrarian. At the end of the day the book is about understanding probability. That ones perception of probability can be different from the fact. Being aware of such ways of thinking can only help a trader.

Cheers

JWG

So we may have 1 profitable scalper in here. Failure of any type of trading is 90% so it will be rare this whole forum is profitable (ESPECIALLY in scalping). I have not been profitable, mainly because the random nature of scalping will suck in new-traders (which I have abandoned long ago)...

I'm sure we have many more profitable scalpers on here than just one. I don't think the markets are random. And since you believe that they are, then I think that the results of any scalping you do will also appear random. I believe the markets reflect your beliefs and therefore make them YOUR reality.

It's all gambling, I'm just saying, would you rather gamble on the slightly longer term, or allow the next big seller/buyer to influence your trade?

I do my best to take advantage of the 'next big seller or buyer' so yes I would love them to influence my trade. I think gambling is trading/betting without an edge, trading is not gambling- a fine line maybe but it is there.

Yes, I could tell the difference on a candle chart, or even a line chart for that matter...
1 min obviously contains much NOISE.

Can you distinguish 'noise' on a 5min chart from consolidation on a hr view? I think the two look very similar.

Let's not call others Naive please =) I'm not calling you names am I? I'm not attacking anyone personally, I'm asking, how many scalpers can admit the short time frames are going to be nearly completely random?

I'm sorry, i'm not trying to offend anyone but thats how I feel.

" Remember also that as the duration of the trade increases then so does the probability that fresh market-moving information becomes available, information which isn't a million miles from random itself "

I don't get into a trade hoping for market moving information

Ben-I don't trade off news, period. It's all in the chart, but most big banks and players know the stuff before (us) the little guy hears about it. Plus markets often do the exact opposite of known information, that's why people lose on their bets...they "over intellectualize" and stay in the trade.

I couldn't agree more!

Rosini-I have tried scalping. I find it random mainly. Not only that, it's a lot of work just to get the same amount of points I can get from swinging trends. What is the average number of pips you pull down (realistically, on avg) and how many trades do you need to do that?

Last week per day= 98, 56, 30, 108, 52. So far this week 100. I'm pretty happy with last weeks results its not as high usually, more like 30-40pips per day and my drawdowns can be quite large but thats what im comfortable with.

Like, on the eur/usd up move we had a month ago...2000 points up...did you-or any other scalper achieve 2000 points in the matter of a little more than a week? I there are great trends to play and stay in positions...rather than battling intraday 8 hours a day

Your talking of 2000 pts in isolation, how many times did you have to test the market until it took off with you onboard? How much risk where you taking? How much of the move could you actually get?

The only difference then would be that the shorter you drill down in timeframe, the larger the spread becomes as a proportion of your overall trading costs. So surely you hoist yourself by your own petard with that argument Rossini.

The cost to trade is a major issue obviously, but I have spoken to maybe 50 brokers and I have got the cost down to something acceptable if I trade a certain size. I have a friend who scalps from the order book, he made about 300k last year but the brokers changed the commotions and it worked out he would have broken even, he is still looking for a deal he can work with!

Sure, there may be the odd profitable trader out there doing this stuff, but surely those traders are merely fighting, albeit more successfully, the slow drain of transaction costs.

I'm with J-Arther (good nick btw) - mugs game on the whole. Of course, if you have better tools, then it's a different story. But imho most people arrive at scalping for two main reasons;

1) They're undercapitalised

2) They can't be bothered to learn anything other than basic T.A. techniques, and have a limited attention span and can't wait any longer than a few minutes for 'gratification'.

I don't have a short attentions span but I arrived at scalping because I believe that it is the right match for my personality and I simply find it easier.

Just my $0.02 as always.

GJ

JWG-Nassim Taleb IS a "losing trader"....he loses small amounts on small bets on the probability that a rare event may happen, and the payout is a huge reward. In fact most professionals don't have a high win rate...and you don't need a high win rate, as long as draw downs are kept small.

JWG-That 2,000 point move was not an everyday thing...correct, but do you apply swing trades while you scalp? That would make more sense to me, because whether it's a 1 time big event or an everyday event, might as well be on it. But the average trade is usually 100-500 points, so the 2000 move was big, but most of the trades are still pretty big in comparison to scalping.

So you average 40-50 pips per day. I think that's fine, but why would you prefer a style of scalping over trade-and-hold? I guess if you like action, sure. I highly doubt most forums have high percentage of winning scalpers. I would say scalping is even more challenging, because it requires a fast execution and cutting losses even faster. It's all preference, but I still argue market is random, and less random on a larger TF. If I can make 500 pts a week and you make 500 pts a week scalping, it's the same, except you need more trades, more effort and more discipline.

To JWG-I have been "swing" trading and I don't even need a stop that wide, lol. The only thing that SUCKS is when you miss a signal, then there is absolutely no trades to make, for hours, days, sometimes a week (but that is less trading=less risk)

If all you do is scalp, there is no possible way to even come close to the avg wins of swinging.
I KNOW this to be a fact, because I use to scalp the Mini-Dow, and all my entries were picture-perfect to swing for LARGE gains of 100-800 points...volatility won't be going away just yet

All forms of trading are gambling, why? Because you risk money in expectation of an uncertain payout (you cannot possibly win 100% of the time). I don't say this to belittle my trading or yours for that matter, but there is such a thing as "professional gamblers" who do use an edge...but it's still gambling I accept the fact...and act more like a professional now, and it has helped.

Here is Websters definition of "gambling":
1 a: to play a game for money or property b: to bet on an uncertain outcome2: to stake something on a contingency : take a chance

I will post my strategy. It's simplistic, easy to follow, but far from perfect. My stops are. . .roughly 25-50pts. You are not going to want to scalp when you see the signals...

So who here is trading for a full-time living?
Honestly Don't lie, we've all paid huge tuition...

I want to show you the setup I use. Like I said before, it's not the holy grail 2.0, but hell, I'm doing a HELL of a lot better following this, than anything I've used before. :clap:
And hopefully I end up helping someone out there who is going through a nasty losing streak.

I set up my charts to Area, 10 min 60 days, and slap on a 500 SMA(yes, you heard me right!) and a 4 SMA.
The 4 SMA is basically following price, but not quite. It eliminates some noise of using just the price crossing the 500 sma.

The 4 SMA crosses above the 500=BUY
The 4 SMA crosses below the 500=SELL



I will post more shots of Zoomed-Up signals...

Check it out...

and setup your own chart to view more signals...

not perfect, but much less work than scalping 5x a day and these are large moves.

Mr.J-Arthur said:

Fooled: The Role of Randomness

(yeah that's a rip off of Nassim Taleb)



I wanted to start a thread, to highlight the role of randomness in the short trading time frame of 1-5 minutes. It's called "Scalping" or in other words, gambling (if you ask me).

Why do so many traders think scalping is profitable? I would assume the 90% failure rate is due to over leveraging and trading in very short time frames. In any market, the bid and ask can spike or drop from a single buyer or seller, especially if it's during low-volume.

Scalping is risky and quite a bit of work compared to trading the larger time frame.
I think the Newbie FX, Futures, or Stock trader should avoid "scalping" at all costs. It will save hundreds to thousands in extra "expenses" and "tuition." Not only is scalping risky, but it doesn't pay to sit at a computer for 5-8 hrs doing 100 trades or more. Why not take less risk, "work" less and capture more points in the trend?

To some extent, the markets are RANDOM! Especially in the shorter time frame (1-5 minutes). It's not hard to move a market...as we all know very well. But is it harder to force a market to trend higher on a daily chart (or even 10 min, 15, 30 or 60)? Yes, because it takes a substantial amount of buy orders to push the market up.

So WHY scalp? I mean, realistically, who is profitable day after day...
Scalping can work if you use excessive leverage I suppose, which is higher risk and it still doesn't capture as many points, pips, or ticks as other methods.

If someone could prove scalping isn't random, I would love to see that (I have seen it work for 1 friend of mine, a rare example of 800% return). And just because we can curve fit a few indicators to data-doesn't mean the price movement isn't random. Scalpers are gambling on a very short time frame.

Click to expand...

My friend has signed up to a scalping signal service, he gets the 'scalps' text and emailed to him every 15 seconds, he's making a killing on the cable.

JWG-Nassim Taleb IS a "losing trader"....he loses small amounts on small bets on the probability that a rare event may happen, and the payout is a huge reward. In fact most professionals don't have a high win rate...and you don't need a high win rate, as long as draw downs are kept small.

Yep. I agree.

JWG-That 2,000 point move was not an everyday thing...correct, but do you apply swing trades while you scalp? That would make more sense to me, because whether it's a 1 time big event or an everyday event, might as well be on it. But the average trade is usually 100-500 points, so the 2000 move was big, but most of the trades are still pretty big in comparison to scalping.

I scalp, I swing. and I use retracement methods.

So you average 40-50 pips per day. I think that's fine, but why would you prefer a style of scalping over trade-and-hold? I guess if you like action, sure. I highly doubt most forums have high percentage of winning scalpers. I would say scalping is even more challenging, because it requires a fast execution and cutting losses even faster. It's all preference, but I still argue market is random, and less random on a larger TF. If I can make 500 pts a week and you make 500 pts a week scalping, it's the same, except you need more trades, more effort and more discipline.

I never said I averaged 40-50 pips per day. Infact I don't even trade forex. I trade futures. Yes I agree a "scalping" (depending on how you define it) does require more effort and more discipline. As apposed to trading longer time frames, which requires more patience and more risk. Its 6 of this and half a dozen of that if you ask me. Its all about finding a trading style that suits you and is profitable. Then applying that to the right market at the right time.

To JWG-I have been "swing" trading and I don't even need a stop that wide, lol. The only thing that SUCKS is when you miss a signal, then there is absolutely no trades to make, for hours, days, sometimes a week (but that is less trading=less risk)

Refer to my previous answer... 6 of this and half a dozen of that

If all you do is scalp, there is no possible way to even come close to the avg wins of swinging.
I KNOW this to be a fact, because I use to scalp the Mini-Dow, and all my entries were picture-perfect to swing for LARGE gains of 100-800 points...volatility won't be going away just yet

I'm sorry but didn't you just say the following in your first paragraph "In fact most professionals don't have a high win rate...and you don't need a high win rate, as long as draw downs are kept small".


All forms of trading are gambling, why? Because you risk money in expectation of an uncertain payout (you cannot possibly win 100% of the time). I don't say this to belittle my trading or yours for that matter, but there is such a thing as "professional gamblers" who do use an edge...but it's still gambling I accept the fact...and act more like a professional now, and it has helped.

I disagree completely. In gambling there is a guaranteed possible loss and a guaranteed possible win. In trading you set a stop loss. But if the trade doesn't do what you expected according to your trading plan criteria you can exit for a smaller loss than you initial stop loss. Profiting is the same... You can ride a winner for as long as the market tells you the trade is still valid. That my friend is the difference between trading and gambling.

Cheers
JWG

Paul71 said:

My friend has signed up to a scalping signal service, he gets the 'scalps' text and emailed to him every 15 seconds, he's making a killing on the cable.

Click to expand...

Hi Paul,

Can you tell us how long your friend has been using this service and how many points he considers to be a scalp on this pair?

''If all you do is scalp, there is no possible way to even come close to the avg wins of swinging.
I KNOW this to be a fact, because I use to scalp the Mini-Dow, and all my entries were picture-perfect to swing for LARGE gains of 100-800 points...volatility won't be going away just yet''

Of course my wins wont be as large as swinging it, but I did ride one trade today and took 36pts on it alone, which really isn't a scalp but hey. For some reason this thread has moved onto scalping vs. swing trading, both are legitimate ways to make a living, both can be profitable, both can be unprofitable. I for one was never questioning that. I still can not accept that lower timeframes are random, and I am interested to hear other peoples views as I had always accepted that most people who trade must view the markets as non random to an extent, whether this includes the lower timeframes or not.

As said above '' Its 6 of this and half a dozen of that if you ask me''

I do trade full time 5 days per week, but I don't need to rely on trading to live, as I have another income stream as well.

JWG-Part of my previous post was a response to you and Rossini lol so that's what I was talking about, averaging 40-50 pips etc...

Paul71-Who can even pull trades every 15 seconds? That's bullocks! (as the english say?)


JWG-Gambling cannot be a 100% chance of winning or 100% chance of losing...if it was, we would be rich...and yes there are differences but it has the same basis-risking $$ for a positive expectation or gain. apply definition from old post...

There can be stop-loss in gambling too. For example folding in poker when someone raises the pre-flop betting to high levels...you can get out cheap, or let them ride you...
and of course, if they actually have good cards, like KK, AK, AA etc...they would have a better pre-flop hand, thus a better probability of winning....but still not a guarantee win or loss. A % of having the better hand over the other guy/gal.

I think the most important issue to address is whether we're "gambling." Gambling in "quotations" because obviously we can put a lot of work into addressing risk, betting size, patterns, indicators and what not. Just because we consistently make money over a period of time doesn't mean we're not gambling...it just means we understand how to gamble correctly, without losing our shirts.

And then there is the other sort of "gambling." The exciting world of black jack and casinos....free cocktails and booze...all for the fun of it...knowingly burning your cash wad....
Most of us don't go to casinos for a living but if you did, you would be a professional...and a gambler! And if that gambler said he "didn't gamble" I would say Nay! you are bull****ting me...you risk money in a GAME to profit from some positive expectation like a flush, straight, 4 of a kind, full house etc...(be it trading, or poker, both are games).

I picture a hierarchy something like this:
(best odds-lowest odds)

traditional business
trading
betting on sports
casino games/card games
slot machines

We can consider trading to be gambling without foolishly gambling. I think the sooner one accepts that, the sooner one can expect that you CAN'T know for sure how hard or how fast a market will move against or in your favor....Which means, we can count on random movement. We can get on the right side of it, but the magnitude is the (X) in the equation...it's unknown, and if you have the equation and can solve for X....YOU WOULD HAVE THE HOLY GRAIL Then you would always know, with 100% certainty when to size up and go all in....

Ah we only wish

Mr.J-Arthur said:

JWG-Gambling cannot be a 100% chance of winning or 100% chance of losing...if it was, we would be rich...and yes there are differences but it has the same basis-risking $$ for a positive expectation or gain. apply definition from old post...

Click to expand...

Please re-read my post. I said "In gambling there is a guaranteed possible loss and a guaranteed possible win" this is applied to every single bet. Please quote me in future when posting a reply.

Mr.J-Arthur said:

There can be stop-loss in gambling too. For example folding in poker when someone raises the pre-flop betting to high levels...you can get out cheap, or let them ride you...
and of course, if they actually have good cards, like KK, AK, AA etc...they would have a better pre-flop hand, thus a better probability of winning....but still not a guarantee win or loss. A % of having the better hand over the other guy/gal.

Click to expand...

I disagree again. At every stage in a poker game there is a guaranteed possible loss and a guaranteed possible win. Whether your at the pre-flop, the turn or the river. There is still a maximum you can win/lose in this situation regardless of your decision to fold or not. The odds are irrelevant... it is fixed gambling. That being the size of your stack multiplied by the players still in the hand. This is not the case with trading. You can make any sized amount of profit on any trade. No boundaries.

Anyway this thread has got a little off topic. Looks like we will have to agree to disagree Mr.J-Arthur

Question:
Do I think the markets are random?

Answer:
Human emotion runs the markets and until the day it stops I will believe the markets are NOT random.

Cheers
JWG

Some irony here in that Taleb in the very book you allude to describes market making as one of the few types of trading that will always be profitable... In my view scalping is a form of unofficial market making...

alan5616 said:

Hi Paul,

Can you tell us how long your friend has been using this service and how many points he considers to be a scalp on this pair?

Click to expand...

It's a wind up.