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Pros and cons of auto trading system? Will be it be illegal?

(Last Updated On: May 21, 2010)

Here is a conversation on reddit.com which pretty well inspired me tostart thinking about blending my knowledge of technology and financial investment. This was pretty inspiring where an indie software engineer launched his own business. He is now clearing millions. Source is http://www.reddit.com/r/IAmA/comments/9s9d7/iama_100_automated_independent_retail_trader_i/

whatswith_this 1 point2 points3 points 6 months ago[+] (3 children)

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bolln 1 point2 points3 points 6 months ago[+] (1 child)

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locktight 0 points1 point2 points 6 months ago[+] (5 children)

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Not relevant. Notice i put easy in ‘quotes’. The value of the dollar is the PRODUCTION that backs it. Spending your time gambling to acquire mountains of dollars just for that sake alone, is VALUELESS. If everyone did that the dollar would be worth ZERO.

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arcandor 2 points3 points4 points 6 months ago[+] (5 children)

arcandor 2 points3 points4 points 6 months ago[-]

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what are ‘people’? imaginary?

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cartooncorpse -1 points0 points1 point 6 months ago* [+] (4 children)

cartooncorpse -1 points0 points1 point 6 months ago* [-]

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People who are people only by the thinnest of technical margins. Of little or no or less value. to the greater good.

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LuxuryProblems 0 points1 point2 points 6 months ago* [+] (13 children)

LuxuryProblems 0 points1 point2 points 6 months ago* [-]

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I’m a bit suspicious of trading, let me tell you why. I’d be grateful for your opinion. This needs a bit of background though:

You know in roulette, you can bet on red or black and after each loss, double your bet. After each win, you’re ahead the initial sum you bet (Martingale betting system). This strategy works as long as you have enough bankroll to double down each time. But now and then, you’ll have such a long string of losses that you lose everything. Moreover, the mathematical expectation for each bet doesn’t change, so since roulette has one or two zeros, over a long time you will lose regardless of the system.

But for a long time, this system gives you the illusion that you are winning and that you have mastered roulette, until it suddenly wipes you out. You have exchanged a single slightly-less-than-50 / slightly-more-than-50 bet for a win-a-little-for-a-long-time / lose-a-lot bet.

Back to trading: A lot of trading advice focuses on managing your bankroll, setting stop losses to prevent too large losses in one go, etc. So my worry is that the underlying expectation has not changed, just that instead of betting big in one go, you make a lot of small bets, but that there could well be a time where a long series of small bets can go against you and still wipe you out.

This would mean that any skill a trader thinks he has is just an illusion, and that trading is still a losing strategy over long times.

Would be grateful for your opinion on this.

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[deleted] 0 points1 point2 points 6 months ago[+] (0 children)

[deleted] 0 points1 point2 points 6 months ago[-]

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When working on system trading, you backtest your strategy against a large sample of data to see exactly what sort of statistical expectancy you can have. It’s like gambling, but you have the odds with you.

To avoid curve fitting, you also run out of sample data, monte carlo sims, etc.

If you’re a discretionary trader, the system you’ve developed should help to provide exactly what sort of R-expectancy you’re looking at. Check out Van Tharp’s work for more detail.

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strangeelement -1 points0 points1 point 6 months ago[+] (2 children)

strangeelement -1 points0 points1 point 6 months ago[-]

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So no reflexion on how absurd this strategy is? Not a word about how it basically defeats the entire purpose of the financial system, which is supposed to channel investments in companies that in turn generate value by using it in productive means? It’s smaller scale high-volume trading that’s “all the rage” on Wall Street and will eventually cause another huge bust in the world financial system.

There is no actual value in this. It’s complete hot air, making money on moving money around without any actual purpose.

In a few years doing this will be completely illegal. All it does is siphon money away from its purpose and into a completely pointless system of moving numbers around just because it’s possible to leech a fraction of it at every turn.

All the betting, shorting and high volume trading will eventually become illegal as well. It’s nothing but a huge gambling system where counting cards is permitted and that manufactures imaginary wealth for some until it crashes for everyone. That’s what a crash is: resetting all the imaginary numbers closer to what they actually are.

Investment is supposed to be a very simple game: some have money, some need money to generate actual value, intermediary is necessary between the two to perform the transaction, investment generates value over time by being put into productive use. Anything else is unnecessary and counterproductive.

But of course it’s easy to defend that it’s neither unethical, nor illegal. True. It’s simply pure waste.

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scottythesmell 3 points4 points5 points 6 months ago* [+] (1 child)

scottythesmell 3 points4 points5 points 6 months ago* [-]

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It’s not waste, traders are providing an extremely valuable service. They are creating liquidity. Liquidity is the grease that allows our economy to function.

Q: Why do you start a business? A: To make money

Q: How do you make money (real money?) A: You sell your business

Q: Why would anyone buy part of your business? A: Because they think it will make them money.

Q: How A: By increasing in value

Q: How does ‘value’ increase? A: Market perception.

Q: Surely that bears no resemblance to ‘real’ value? A: There is no such thing as ‘real’ value; something is worth what you can get for it. A large collection of informed people by and large do a reasonable job of determining fair price. Of course occasionally they fuck it up, any non linear dynamic system has the potential to do unpredictable things, but I challenge you to design a better system.

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strangeelement -1 points0 points1 point 6 months ago[+] (0 children)

strangeelement -1 points0 points1 point 6 months ago[-]

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I did not say traders do not provide a valuable service. I said traders who engage in short term betting strategies like high-volume trading and other schemes are destroying the very purpose of the financial system and stock markets. It’s especially bad when most traders do just that, as is the case recently.

These strategies have nothing to do with providing companies with money. Companies raise money from the initial sale of shares. Any trading after the initial sale serves as confidence in the company’s ability to generate revenue and should normally be held to gain dividends. At least that was the case until traders got creative and invented ways to artificially create perceived value and generate revenue off transaction volume.

And a company does make money by selling itself. That’s nonsense. A company makes money by creating products and services and selling them. That’s the only reason any company would have value in the first place. Alternatively a company can raise money to expand or improve its activities, but that does not raise the company’s values. It’s the resulting revenues created by investment in productive means that increase value.

Market perception is just that, perception. Real value is actuarial calculation of the company’s assets and revenue-generating means. The dot-com bust should provide enough understanding of the difference between perception and actual value and that perception can be completely off track until it all comes crashing down.

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