Friday, December 12, 2008
Speculating in currencies is so much fun – NOT!!
Airport passengers suffer a pounding as euro surges
"Thousands of private investors in Britain are joining institutional investors in betting that sterling has further to fall. Spread-betting companies are reporting a surge in the practice as clients, now banned from taking down bets on banks, switch their attention to the currency." ...nice to see those pesky 'short' sellers have found somewhere new to ply their trade. It still amazes me that this practice is allowed, when it affects everyone in the long-term, for short term gains for the few. My mistake it's the pinnacle of socialist capitalism.
Posted by bystander @ 06:44 AM (1843 views)
59 thoughts on “Speculating in currencies is so much fun – NOT!!”
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Mr. Gruff says:
Erm, to be long on one currency you HAVE to be short on the other in the pair. That’s the way forex trading works. You CAN’T ban short selling on the currency markets.
mountain goat says:
Bystander are you saying the £ is weak because of short traders? Then I disagree strongly and think you are mistaken. The £ weakness is based on economic fundamentals, ballooning gov debt, record personal debt, UK facing a vicious recession thanks to the mother of all housing bubbles, over reliance of our economy on the financial industry which is at the heart of the economic problems causing this world-wide recession etc
techieman says:
bystander bystander bystander…. why on earth would you be amazed? Its very straightforward if the currency, shares, metals whatever are perceived to be overvalued they are sold. I really cant comprehend why anyone would blame short sellers. The fact is the market adjusts to the underlying fundamentals. When the moves start in the markets the powers that be will try to discredit them.
Thats why the market is a lead indicator. Further into the move the fundamentals catch up. Yes the moves may be overdone, but soon IMO there will be a volatile and abrupt end to this selling of the pound… against the euro at least – although i think there will be some more downside first. If you trade (and you want to trade relatively safely) you try to anticipate the big moves by getting in early when the risk is minimal.
Now its normal for people to – and i am sorry of this offends you – join the party late and those are the ones who will overstay and end up having to clear up after. [look at HPC]. As for me yes i am looking to hedge more of a cash holding in the Euro soon in terms of time although we may have some big daily ranges first [i have already got out of 30% at what looks like a very premature level – so i suppose that will make you happy!! :-)] . Bystander put it this way if people are selling the pound they are buying something else, i suppose that would be wrong too if they were buying pounds against Euros?
Yes moves are potentially magnified by traders thats true – a bit like a bungee – the ones that stretch it most will be the ones who get hurt by the spring back, BUT the moves are made BECAUSE of the underlying reasons for it. Of course WHERE the spring back occurs is a very difficult question, you can link it to the housing bubble but in minutae, i.e.a condensed version in terms of time.
Finally 2 more things 1. dont you think the government WANT the pound to go down? 2. Darling /Brown isnt going to say what level they want because that would just be a target. At some point when the market is very oversold the g8 will prob come in and squeeze the shorts. When and where that is and what happens then is the quadzillion dollar or is that pound question.
techieman says:
MG Didnt see yours before i posted
mountain goat says:
TM interesting that you are putting more money in the euro, wish I had done this a couple of months ago, but don’t think I will now. Euro is vulnerable too now I think, with Germany’s economy needs differing so much from the weaker Euro countries.
techieman says:
MG at the risk of having this as a “private blog”. I am NOT putting more in the euro. I have had (for quite some time) a quite large Euro cash holding. I hedged 30% of that at around 8200 now i think it looks “blow offy” i.e. big daily volatile moves with an upward bias. Does that mean i put more in? NO – as i said its late in the party and thats when the fights start or the place gets raided… [not that i go to those sort of parties!]. I dont like to be a johnny come lately as it doesnt really suit my personality.
So i am looking to hedge more (an Exit strategy] but i therefore need an upside target to decide where to short the Euro against my 70% cash position. Where (price) I do that is what i am toying with. Sorry if i was unclear.
bystander says:
Techieman and MG, I am interested to know what will be the mechanism, trigger that will send the euro down against the pound. Personally, I am not convinced that the eurozone is as insulated as it would like to portray itself and know of at least one of the so called stable economies, the Netherlands where 100%-125% mortgages are the norm, especially when the buying costs(plus a new car etc.) are taken into account, while there are mutterings amongst international companies that things are not as rosy as it may appear. The ZEW reading came as a bit of a surprise and obviously helped to shore up pro-euro sentiment recently. And it is this that worries me most and I suppose I am angered by anything I see as bringing the pound closer to being forced into the eurozone. This is partially based in patriotism, but mostly on the UK keeping some form of independence from the EU machine.
James says:
bystander – you seem to have accepted the point that shorting is hardly to blame for any of this. Good, it’s an argument that’s been had many times on these boards as the ignorant media has scapegoated ‘evil shortsellers’ and ‘champagne quaffing mayfair hedge funds’ and many have believed them. Just to reinforce, imagine if we’d been able to open a short position in housing over the past few years. There’d have been a counter to the relentless nonsense spouted by Allsopp, Law et al and maybe we wouldn’t be in the mess we are now.
mountain goat says:
Bystander I read an interesting article (in the FT I think it was but can’t find it now) about default versus devaluation. IMO the current situation we are in, looming severe recession for the first time in decades, would normally lead to large numbers of insolvencies/repossions, of individuals, companies and countries. Central banks hope that by printing money they can avoid this and are willing to sacrifice the value of currencies for the greater good of limiting insolvencies/bankruptcies. The UK is very obviously on this path. Euro zone countries don’t have this freedom because they are bound by a common currency and some countries, Germany for one, doesn’t want to devalue the currency. In fact Germany’s stance means the Euro is strengthening. Well then the threat becomes insolvency and default of the weaker countries. When this starts very difficult choices need to be made. Either Germany agrees to devaluation or the weaker countries will break away or default. Anyway that is my simplistic take on things.
mountain goat says:
To their credit Germany is one of the few G7 countries that have experienced these scenes, and have been more prudent as a result for the most part.
techieman says:
Bystander – yes i agree with your stance. I have consistently said on here i dont believe in the Eurozone concept (i actually have said that throughout its existence for the very reasons MG alludes to) and yes implosion is a possibility, although i think that there will be a political fudge attempted first. In general though i am not that concerned with the why unless its a UFO (unforseen occurence) that blows out of the water from nowhere then i have faith that the markets will be the first to discount a fundamental move – as i explained above.
I will give you a topical example. I was long the FTSE @ 4000 because the technicals indicated a potential upside with low downside risk and also because its seasonally the right time to go long etc etc. I sold out most 75% at just under 4400 because it was at a trend channel top and because it failed to follow through. (Also i dont really want to be long at this time because overall i think we go much much lower). Now i am not saying this to show how clever i am but the US markets were technically vunerable last night (potential to fill a gap), so it came as no surprise to me this morning that the market in the US had tanked last night and that the FTSE was down to the low 4200s.
Based on? The failure of the bailout of the auto industry or was it because of the fact that we were at the top of a trendchannel and a little overbought? I will leave that as an option question. Why was i not 100% out rather than 75%? Because it is possible i am wrong , as i was with the Euro.
Now the bottom of that channel is around 4220 – so i think its volatile today but wouldnt be surprised to see another upleg into the last couple of weeks of this year and into 1Q 2009.
matt_the_hat says:
11. techieman – I like to hear your comments don’t get me wrong, but am I correct that ALL successful long term investors, i.e. ones who stay in the business long enough where the randomness is averaged out, do not trade on a day-to-day basis and look for long term fundamentals and stick with their investment decisions. I sometimes think the only ‘upward bias’ comes from peoples own reporting of their investment decisions.
If I were to adopt the same strategy, I would buy Euro’s (Deutsch marks), the Germans are not going to repeat the same mistakes as the 30’s. However Greece will soon freeze all deposits and withdraw from the Euro following Browns lead for ‘quantitate easing’ – what a nice why of saying stealing from savers to give to borrowers.
bystander says:
James, you are right I do accept that short selling is not to blame for the causes of the pound devaluing, commodities bubbling etc. but they and the hedge-funds, many of whom capitalise from these short positions, cannot be painted whiter than white. They have played an intrinsic part in the building up of negative investor sentiment. The mysterious ‘masters of the Universe’ were, through their very need for secrecy and publicised ‘huge’ earnings, setting themselves up for a fall in public sentiment and when the media/ HMG find a scapegoat they will pounce. If there was more transparency in the dealings of these fund managers then perhaps there would be less media interest, but then again if the secrecy goes then so do the fat profits. So yes, I take your point that shorting isn’t the cause, but it is a bit like giving someone who has a cold a dose of pneumonia, it doesn’t tend to make the patient any better. Just a quick question in addition, why weren’t you allowed to enter short positions against property?
str 2007 says:
bystander
why weren’t you allowed to enter short positions against property?
I think that’s selling to rent !
techieman says:
Hi Matt, well i can only speak for myself. I have seen lots of traders come and go as they rely on the fundamentals (including yours truly to begin with), but although yes in the long term the fundamentals will dictate where we go, they are often late. For example alot of so-called economists were saying there wont be a HPC because unemployment is low. Thats drivel, unemployment is a lagging indicator. These people are the ones i would chastise because they either know and are being mega VI or dont know and shouldnt be doing what they do! And HPC is a prime example we all knew they were in a bubble which would have to deflate or burst but how long did they go on bubbling for? If you couldf have gone short you would have been killed – the old adage “markets can stay irrational longer than you can stay solvent” is applicable.
You could have been selling the pound against the Euro along time ago and you would have been more and more wrong. Yes the fundamentals will out but by the time they do you may well have had most of the move in the direction, and by then there may be a new fundamental being discounted in the opposite direction! . I suppose it does depend a bit – a fundamental might tell you the direction but not really the when and how much. The problem with the fundamental analysis is that you end up staying with your position because you are certain of the fundamentals! Thats not to say it doesnt have its place, i will give you another example – last week the unemployment numbers came out and the market initially tanked (as they were much worse than expected) however you might remember the dow ended up around 280 i think, after being down a fair bit on the release of the numbers. So if you relied on fundamentals you would have been completely bamboozeld by the upside move.
As for successful long term investors, what you have to realise is that we have been in a bull market more or less uninterupted for the last what 50 years? In a bear market the strategy of buying value and holding MIGHT not work quite so well. But each to their own and whatever you are comfortable with.
IF the septics [tanks] dont follow through on the downside this afternoon then i will look to go long, but from now on in it starts to get a bit thin (trading volumes i mean), so i wont be throwing large lumps around.
I have no interest in whether markets go up or down and dont emotionalise my decision. If i thing they go up i go long and vice versa, of course when i have a position i have a huge VI that they go my way, but at the outset i dont care if i get a signal to short or long the market whatever anybody else says. I may be right or wrong but thats my decision and responsibility. If it goes wrong i dont expect a bailout, which is why i am anti this rubbish re people investing in property being bailled out by me and you!
tudorian says:
@techieman
Thanks.
Although I do not yet directly invest in the stock market, it’s interesting to hear your methods and philosophies…please keep the insights coming. 🙂
51ck-6-51x says:
matt_the_hat
“i.e. ones who stay in the business long enough where the randomness is averaged out”
I HAVE to point this out…
Randomness does not average out!
N.B. This may be separated from the fact that the market can stay irrational longer than you can stay solvent (pointed out by techieman)
Whilst there may well be those who make good investment decisions, they may not win. Whilst there are long term winners they do not necessarily make good decisions.
Think about it this way – imagine that a pool of investors each maintain a portfolio in some equivalent random fashion* then there will be 1 investor who outperforms and there will be other investors who lose their shirts. This is a natural consequence of the ‘central limit theorem’.
Alternatively – if I toss a fair coin ten times and it comes up heads every time then, noting that I am not able to fix the tosses outcome by skill, what is the probability that the next tosses outcome will be a tail? Answer is 50% – the events are ‘independent and identically distributed’
Interestingly, I do have to word the last question carefully since the coin may be biased or I may be able to influence the toss. Here is a relevant article, referencing Paul Wilmott who ran a successful volatility arbitrage fund – he is a scientist and mathematician, but realises limitations too:
http://news.bbc.co.uk/1/hi/business/7761423.stm
*
i.e. they all pick a directional unit value of a random asset uniformly from some universe of assets at every poisson time
e.g each investor has a laser pointed at a light sensor, when the sensor has counted T photons the investor tosses a fair coin for buy / sell, rolls an N-sided dice to choose the asset and invests 1 (say +/- $1000) – to weed out the insolvency issue assume your investors have zero funding costs.
The methodology may be constrained, for example the number of assets in the portfolio could be limited, etc..
bellwether says:
TM I agree with you on a number of things, stock market going a lot lower in the medium term, Euro being overbought.
Also for someone who likes TA you do generally talk more sense and less jargon. Having traded a little it is obvious that share movements TEND at least to follow short term patterns but knowing then to use other evidence seems almost more important.
In terms of track record it seems to me value investing is the only investement strategy to have been proven to be succesful over substantial periods of time (although right now it seems vulnerable as we simply don’t know what sort of world we will be living in 12 months from now) That (the success of VI) may be explained by our being in a long term equity bull market although eg Buffet may some of his best annualized gains during the 1970’s when things were generally grim for stocks.
Anyway my point , assuming you have been trading over time, what sort of % gain are you making averaged out?
techieman says:
51ck-6 thats far too technical for me mate :-). I just try to keep things as simple as possible. It generally works for me (but not always of course) and is in my comfort zone, but it is a bit seat of the pants stuff, and so i recognise that wouldnt suit most people. Thats not to say its better than anyone else – i knew a guy who arbitraged the volatility on options, so he never had an outright opinion just a matrix of profilts and losses and would buy volatility when cheap and sell it when expensive. I think he made a ton of money but as its generally not directional I think it would bore me to tears! As i said i take my hats off to these clever chaps!
51ck-6-51x says:
Str 2007:
Selling to rent is indeed a short play (if you plan to buy when the asset price falls), BUT not the type of practice called short-selling made by the “speculators and spivs” that any short sale ban is actually aimed at.
The kind of short selling that some people are against is selling an asset one does not own.
I am not in that camp (I think, given that we are in a capitalist system, the availability of such short selling is actually a good thing).
You could and can short the housing markets via indicies or by buying protection (selling CDS).
In fact this kind of trade was the most successful trade of 2007 – made by John Paulson:
http://www.reuters.com/article/hedgeFundsNews/idUSNOA73339920080417
matt_the_hat says:
17. 51ck-6-51x – what are you talking about.
If you toss that coin an infinite number of time and it is unbiased you will get 50% heads/tails – QED
The problem with the credit crunch is the i.i.d assumption, it got LTCM in the 1990’s. Shares are not i.i.d. in bad times or good, the correlation factor goes to one. Thats why these AAA CDO (or whatever they are called all went bad), i.e. subprime borrowers, live in the same districts, there was no diversity etc etc.
TM fundementals are an indicator, i.e. salary multiple for house prices 3.5x, IIR (discounted cash flow), budget surplus’, industrial diversity of a country, demographics, These things won’t predict the stock market next week but these won’t change next year and the irrational exuberance/fear will average out.
The reason why the pound is low is that GB will print money because the government borrows in £’s and who wants to lend to that, therefore the currency is discounted for that risk.
51ck-6-51x says:
bellwether:
Yes, I agree – I think recessionary periods produce the best fundamental value trades. However measuring ‘success’ may be harder than you think.
My opinions:
To succeed using fundamentals I think the best strategy must be a private equity style – that way one finds value and implements improvements to enhance the operation (relys on business skill as well as fundamental value finding skill).
For pure trading strategies though I think the best results will be made by the very lucky and the second best by quantitative strategies.
One could define success as the net worth, a good indicator one may think – but it takes no account of risks taken – by this measure a technical trader with the aid of leverage and large balls would probably win any such competition.
Maybe alpha is a better measure? But it starts getting more complicated to measure – are there loopholes that may be employed to skew such a performance measure?
I’ll stop now 🙂
51ck-6-51x says:
matt_the_hat:
I beg to differ RE: Your infinite coin toss experiment.
If I toss a coin a large number of time I EXPECT there to be 50% heads and 50% tails, however repeating such an experiment will produce different results. In the limit (i.e. as N tends to infinity), I will have a normal distribution:
http://en.wikipedia.org/wiki/Central_limit_theorem
I totally agree RE: Shares are not iid
However this does not counter the argument that there will be some investor in the tail of the distribution of P&L across investors in the experiment I gave.
techieman says:
Bellwether – I cant give you an average out as basically i am learning from mistakes as we go along (and i have been doing this a long while!!). I actually dont trade daily in and out but look for quite low risk (as i perceive it) and big gains, and trade over a few days at least (unless it goes the wrong way of course). My experience is everything works until it doesnt – eg MACD, RSI, chart patterns etc. I could give you a number but its non sensical. Effectively i trade with smallish values at risk so my ROI would be very volatile, and at the moment in the (and i am a bit embarrassed) high hundred percents (up thank god!) but as a percentage of the “fund” if you like quite low. I would say that this has been good for a couple of reasons mostly being on the right side of the downmove in equities. As i think i said at the time i made around 1000 points on some of that trade, now i have never made that before.
My philosophy is to take measured risk with relatively small amounts at stake. Now what constitutes a small amount to me is difficult to say but an idea is that a £5 a point move in the FTSE would be from 5% to 20% depending on how good i felt about it. the last move up from 4000 i had 50% of the max for me, so 10% so i was trading £50 a point. I am sorry if that doesnt answer the question but really its a difficult thing to get across. I was very dissapointed in the £/ USD as i got short @ 2.03 and squeezed out at 1.99 on a pull back – now to be perfectly honest had i stuck with that i would have liquidated the final 5% probably at 1.50 and retired! (well then just punted for a bit of fun now and again and or at least have had a year off – my bet sizes in currencies tend to be bigger). But if my grandma had wheels she’d be a car! Of course i dont say on here what other markets i trade other than the financials. The rest are probably of no interest to the people here.
As i said i have cash in various currencies and some gold – so i have hedged the currencies with bets but the £/$ position was much move leveraged than the amount of $ in cash i have.
Finally i am not interested in having a hedge fund or anything like that to be honest i tend to make stupid decisions with OPM (i.e. too averse).
51ck-6-51x says:
techiman: sounds like gambling to me ;p
techieman says:
“ROI would be very volatile, and at the moment in the (and i am a bit embarrassed) high hundred percents” by the way by ROI i dont use the initial margins (deposits) required from the exchanges. I use a table of values that gets adjusted weekly based on the average size of the move in that market over the past 2 months. So in effect my ROI can go up and down against the market even though the amount hasnt changed.
Its not ideal but really what is?
matt_the_hat says:
23. 51ck-6-51x – you can differ but being right is a different matter – it can’t have a continuous distribution (of which Gaussian is one case of a continuous distribution), when the outcomes are discrete, i.e. Heads/Tails. The probability mass function will by 50% weighted on heads/tails. Now if you are trying to estimate these probabilities from samples, then the variance of the estimate reduces with the number of samples, i.e. as N -> infty, the estimate variance goes to zero. Your wiki page is talking about something completely different and would be relevant in our coin tossing example if you could re-run history, however if you are like me (western, white, male, live in a democracy, free(ish) education, partial freedom of speech, under the rule of law) then I don’t think a history re-run would be in your favour.
techieman says:
51 ck – yes you are probably right! But as i said it depends… i only ever have positions open so my net worth could be reduced if it all went t1ts up by 10%. And that has never happened. In that way i think i am much less of a gambler than some traders. Not all trades are in the same direction either, so there is an amount of hedging involved – at least i think there is!
Anyway lifes a gamble….. isnt it? :-). Now where is that FTSE !
mark wadsworth says:
What Mr Gruff says, first comment.
Currency speculating is enormously good fun, as it happens, although in the long run is a zero-sum game.
matt_the_hat says:
TM – just a theory.
What about if value (long term investors) win out in the long run. If everyone followed this methodology then the stock market would remain constant (stay with me I know there are loads of assumptions here), the gains would be discounted and reflected in the share price. It is the investors that seek short term (momentum) style strategies that try to beat the market that cause short term (hours,days, weeks) volatility. However, for every short term investor gain one loses (assuming money is not printed – constant money supply). My theory is that for every short term investor gain/loss there is a positive difference and this value is passed to the long term value investor. Would appreciate your thoughts.
str 2007 says:
51ck
When they talk of the derivatives market factoring in a 22% fall next year and a further 14% in 2010 based on the Halifax index – where is this market and how do you play? Have you got a link?
Truth is I’m probably already gambling enough in this market but I’m interested to see how it works.
I understand with regular commodities how fixing a future price creates a + and – market on which to speculate. I don’t fully understand who would place a bet against someone betting that house prices will fall over the next 2 years. Therefore I don’t see how there is a market as such and who pays out the winners who bet correctly on a fall.
Are you able to explain this – in English ?
techieman says:
that sounds like we are going down the efficient market hypothesis when all moves are reflected in the price. http://en.wikipedia.org/wiki/Efficient_market_hypothesis. Either way as i said you are, amongst other things assuming that value investing will always win out. I dont subscribe to either of those points of view but i dont understand your last point that for every short terms gain or loss there is a positive difference and that a value is derived. If trading – as we know – is a zero sum game then how can that hold true. Nope maybe i am being a bit simple, as i said i trade based on pattern probabilities coupled with some other tech indicators. I dont spend much time thinking about how i am affecting someone else, if i did that then i might as well give up.
bellwether says:
Cheers TM. Been investing/gambling for a few months now and it is so much more difficult than it appeared when looking on from the sidelines, I think because sense of timeframe contracts relative to amounts at stake and having confidence in decisions is more difficult than imagined. I think being able to detach while making reasonably educated guesses is probably the aim. At present tend to cut and run too quickly but maybe no bad thing in this market
bellwether says:
Cheers TM. Been investing/gambling for a few months now and it is so much more difficult than it appeared when looking on from the sidelines, I think because sense of timeframe contracts relative to amounts at stake and having confidence in decisions is more difficult than imagined. I think being able to detach while making reasonably educated guesses is probably the aim. At present tend to cut and run too quickly but maybe no bad thing in this market
matt_the_hat says:
Sorry what I was trying to say is that in the long run, short term investors lose and their loss is passed onto the value investors – therefore I was thinking that a short term strategy based on momentum not value/fundamentals in the long term loses out. In the example above I was illustrating this as each trade the short term investors make between themselves, a small percentage is passed onto the value investor. A bit deep I know and only a theory.
51ck-6-51x says:
matt_the_hat:
The limit of the sum of a binomial distribution is Gaussian and IS continuous – you have infinite discrete events summed.
The outcome of a finite experiment is not continuous of course – it just approaches the continuous case, but once you are proposing the infinite one must take expectations and moments of the limit. The variance does not tend to zero!
If I make 1 for a head and lose 1 for a tail my final density for an experiment of N tosses would be {(end balance, probability)}
N = 1: {(-1, 1/2), (1, 1/2)}
N = 2: {(-2, 1/4), (0, 1/2), (2, 1/4)}
N = 3: {(-3, 1/8), (-1, 3/8), (1, 3/8), (3, 1/8)}
N = 4: {(-4, 1/16), (-2, 1/4), (0, 3/8), (2, 1/4), (4, 1/16)}
…
This tend to the normal distribution.
Basically when you say “If you toss that coin an infinite number of time and it is unbiased you will get 50% heads/tails – QED” you are wrong. You would EXPECT to get that outcome due to the mean, but there will variance
There is always a non-zero chance that you end up getting infinite heads and zero tails. There is always the significant chance that you have one more head than you have tails.
As you correctly point out a rerun of history would not be in your favour, this fits my argument – the expected does not always occur – even in the long run!
When you say “ones who stay in the business long enough where the randomness is averaged out” you are making an incorrect assumption – randomness does not average out in a single experiment it only averages out in the expectation – that is across many experiments.
matt_the_hat says:
34. bellwether – the way I like to look at this game is that everyday some stupid/intelligent person comes to you with a price, if you know the fundamentals are good then buy, if they are bad then sell. Don’t get sucked in to fear/greed and always have enough cash insurance so you don’t have to liquidate when the stupid person gets frightened.
amjidk says:
anyone think that the pound might appreciate v the dollar soon?? (i might want to delay my order from China, if it might improve in a few months)
51ck-6-51x says:
damn it forgot to enter my password…
techieman:
Yup, a good gambler knows about the risk of ruin:
http://en.wikipedia.org/wiki/Gambler%27s_ruin
matt_the_hat says:
38. amjidk – Nobody on this site knows otherwise they would be in Monte-Carlo on a big bl00dy boat drinking champagne.
techieman says:
aha Matt i see. Most punters lose – particularly in futures because they think its easy and have no developed plan and are under capitalised and too greedy … a whole host of other reasons. So yes that money goes somewhere – some to more capitalised investors say who are able to buy more shares with that cash and therefore say push that price up. I actually think its a point but it would be easy for all sorts of holes to be made in it – the money could go in commissions for example.
re your other point If you base a strategy solely on momentum you are going to come unstuck rather quickly IMO. The overall thing is per the Kenny Rogers song – sorry if thats a bit cheesy but i try to take my mind away from over-complicating things. You know the one “the gambler” …. “you’ve got to know when to hold ’em know when to fold ’em….etc.”
letthemfall says:
51ck etc
I don’t think you even need to invoke the central limit theorem to argue that when investments are chosen at random, some sets will do well while others do badly. There was an amusing expt a few years ago where several individuals were invited to choose a collection of shares. One was a 3-year old; the performance of his shares were not the worst. (You’re dead right about the coin tosses, btw.)
On the fundamental vs technical approach, I imagine those here who str did so for fundamental reasons. Not the same as for more liquid assets of course. Personally I have no great faith in technical analysis because I think it is too unreliable. On the other hand, Anthony Bolton uses it (in combination with fundamentals); and if anyone knows what he’s doing, it’s him.
techieman says:
51 ck – im not sure if thats complimentary or not :-). All i can say is you can look at some of my role models- Richard Dennis and Curtis Strange for some insights…. Im not sure if you have heard of the turtles.
amjidk – “soon” is a very difficult term. Yes it will but it may be after it reaches lower levels than now. Personally i would need to see some sort of bottom pattern before going long. Know thats unhelpful, but yes dont think anyone has a crystal ball. I think the $ goes stronger versus the Euro but this move up to 134 has me a bit puzzled as i was looking to go long $ v the Euro thinking the latest move is a pullback against a final move up for the greenback, and that move was bigger than i expected.
51ck-6-51x says:
letthemfall:
Indeed Bolton has a very good track record!
I believe there are some useful technical indicators and that fundamental analysis is of great use. However my method of choice is quantitative.
Furthermore I believe that to run a successful investment portfolio one needs to be relatively well capitalised (or equivalently have favourable funding!), without this (most people) I would stick to researching fund managers and moving between medium term tracker investments and cash rather than attempting to beat the market oneself.
jack c says:
@techieman – “Now where is that FTSE !” (Friday, December 12, 2008 12:05PM” its currently at 4231.25 down -157.44 -3.59%
What level do you anticipate by end qtr 1 of 2009?
Here’s a prediction from me today – Dow J off approx 7% by Friday’s closing bell.
51ck-6-51x says:
techieman:
It is not complimentary and is not the contrary. Gambling is an art – I could not comment on any projected success or indeed, as per my arguments, historical success other than by measuring statistical properties of your performance, such as alpha. Furthermore I have not qualm with anyone putting their money where their mouth is.
51ck-6-51x says:
jack c:
I think the Dow will fall quite a bit today also – my gut just tells me, and instinct can, indeed, be powerful.
What odds would you put on Ford or GM collapsing whilst the politicians try to come to some agreement? Can you imagine what will happen if one of them default over the weekend?
I always say making accurate predictions becomes much, much harder once politicians get their oar in!
matt_the_hat says:
36. 51ck-6-51x – Great fun I must say and it is good to have these discussions.
If you keep on with your example, then the outcome can be divided into a ‘typical’ and ‘non-typical’ set. The typical set will have equal H’s & T’s (with different permutations), the non-typ will be the other sequences. When the experiment goes to an infinite length sequence then with a probability approaching one all sequences will be in the typical set, i.e. 50% heads/tails. The variance drops away as the probability of being outside the typical set gets smaller when the sequence size increases.
I do take on your point about sample vs ensemble, and if all information was present then fundamentals could be determined however I argue that price volatility is primarily caused by short term irrational human behavior and without accurate models on human behaviour short term trading is just gambling on instinct.
matt_the_hat says:
Sorry I am being a numpty to close off the argument what’s a Guassian distribution with mean 0 var 0 – delta function, i.e. brings your Gaussian argument in and proves 50% heads/tails
jack c says:
@51ck-6-51x – agreed, this is gut feeling on my part plus the uncertainty over the US car bail-out failing in the Senate suggests the Dow will be down 200pts+ on the opening bell and the losses will extend. I cant see how they can let the big 2 go under as the knock on effect will be massive – Banking crisis/Automotive crisis etc.. we really are on the edge of all being off to hell in a hand cart if they default.
Good observation on the politicians BTW.
techieman says:
Jack you should know me better than that do you mean during 1q09? For that i can say i expect it to be nudging 5,000 but its a bit long term for me. All i can say is that i have thought we go higher (else i wouldnt have been long!) but to be honest i have been disappointed. As for the Dow today i see its at 8310 as we speak and ftse flirting with 4200. Interesting… in terms of a % move down i think thats 3% so far, as i said i am looking to see if there is follow through. My trade of choice would be to go long but with a relatively tight stop – say +4180 stop @ 4150. (low has been 87). Reason for the stop there? 4170 is against a trend channel and fib 61.8% support.
techieman says:
so yes lets see – as for my 25% long @ 4000 – i am tempted to average that with another 15% about now and put the stop in where i said, but i think i will just run the 25% with a stop @ 4050 and kick off me shoes! In any case its all a bit tight so i might have punted some calls. Decisions Decisions.
matt_the_hat says:
27. matt_the_hat – I hate to have to say this but my comments – ‘if you are like me (western, white, male, live in a democracy, free(ish) education, partial freedom of speech, under the rule of law) then I don’t think a history re-run would be in your favour.’ – are not a sign of any discrimination by myself against anyone not fitting into these categories, I just believe that society/history in general has been more favorable to this sub-category for no other reason than ignorance (race/gender) and with 800 million people still malnourished in a world of truffles and champagne then most of the people reading this blog should feel very fortunate that house prices and not water supply are at the top of the moan list.
jack c says:
@techieman – nudging 5000 sounds interesting and is in line with others I have consulted (if thats the correct term)
Dow currently down 196pts -2.25% so the first part of my prediction (guess) is spot on – lets see where we end the day but i’m still going with a 7% drop.
51ck-6-51x says:
matt_the_hat:
yes a X~N(u,0) is dirac delta at u. This does not prove your 50-50 limit theorem though.
Each coin toss is a symmetric Bernoulli trail, which is a Binomial distribution with n=1 and p=0.5, that is X~B(1, 0.5).
The sum of independent, equally weighted Bernoulli trials is also Binomial distribution:
B(n, p) + B(m, p) = B(n + m, p)
The mean of B(n + m, p) = p(n + m)
The variance of a B(n + m, p) = p(p-1)(n + m)
The variance does not tend to zero.
Please prove me and the rest of the mathematical community wrong:
http://mathworld.wolfram.com/BinomialDistribution.html
If you doubt it try this out:
http://bcs.whfreeman.com/ips4e/cat_010/applets/CLT-Binomial.html
matt_the_hat says:
55. 51ck-6-51x – I don’t know about the rest of the mathematical community but if you go to your widget and put the probability at 0.5, then slide slide the trials to infinity, you will see a delta function at infinity/2, i.e. 50% – QED – you read wiki too much – I hope you don’t build control systems for aircrafts
51ck-6-51x says:
matt_the_hat:
You actually fell right into my novice trap 🙂
What does a big-picture N(u, inf) look like? Oh it LOOKS like a delta function – as you correctly pointed out.
However the variance does not tend to zero – it actually tends to infinity.
What you want to look at to see this point is not the ‘shape’, which is the natural thing for the human mind to look at, but rather the height of the mode – see how as n increases the height decreases. We (well I hope you) know that the area under the curve must be one (the probability of an outcome is certainty), so where is the rest of the distribution? It’s out in the tails.
I have studied mathematics for many, many years and have a Masters in engineering from Imperial College, where I concentrated on artificial intelligence, signal processing, control and optimization. I would be quite comfortable designing control systems for the aeronautics industry thank you very much.
I only send Wikipedia because people tend to trust it (Note I also sent Wolfram) – I have plenty of books on all aspects of such mathematics and plenty on the mathematics of finance too.
If you really do disagree with the proof of and result of equation 67 on the wolfram page then please PROVE it wrong.
gardeniadotnet says:
57. 51ck-6-51x said… matt_the_hat: You actually fell right into my novice trap 🙂
Ouch! I could see that coming.
51ck-6-51x says:
gardeniadotnet – you know me too well 🙂