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The way the math works out with that distribution: only 80% of them lose money over one year, but as time continues over multiple years, the percent losing mone
by thedevil 10y ago
The way the math works out with that distribution: only 80% of them lose money over one year, but as time continues over multiple years, the percent losing money approaches 100%.
- dietrichepp 10y agoThis is not how the math works, and it shows a common statistical fallacy. We cannot assume that the chance that a person loses money one year is uncorrelated with the chance that the same person loses money the next. Here is a simple model a mathematician might realistically use to model this. Given N traders, let P_1..P_N be iid Beta(α, β), and let the chance that trader n loses money during a year be Bernoulli(P_n). The nice thing about this more complicated model is that the simpler model is a limit case of it. This "first approximation" lets us use simple mathematical tools to test hypotheses like that by providing an alternative model. If our beta distribution looks more like a constant distribution (with high values for α and β) then we can conclude that the number of traders who lose money approaches 100% as time goes on. If the estimate for α and β is lower, we might reasonably conclude that there is some factor of skill involved. This is just one possible model you could use to test if there is skill involved in day trading. There are many other models which we could test which would also mean that the proportion does not approach 100%, such as a models which assume correlations between different years.
- verroq 10y agoI think he was just doing a play on words with the ambiguity and you went full math on him. >only 80% of them lose money over one year, but as time continues over multiple years, the percent [that loses some] money approaches 100%.
- dietrichepp 10y agoI'm probably going to continue going "full math" in the foreseeable future.
- verroq 10y agoOh I quite enjoyed it
- thedevil 10y agoOkay, okay. To be strictly correct, I should have said something like "with that distribution and any reasonable assumption about correlation".
- dietrichepp 10y agoAre you saying that it's unreasonable to suppose that some people can make money day trading in the long run? I was just illustrating a simple model you might use to test that theory.
- thedevil 10y agoI'm saying it's not reasonable to think that a private individual can make a long-term profit day-trading, skilled or not. It's quite reasonable to suppose lots of impossible things. How does your model account for magnitude?
- dietrichepp 10y agoThere are professional day traders who earn an income over the long run by day trading. This is a true fact. It seems like you are trying to contradict this fact… or do I misunderstand what you are saying? The model I gave was the simplest model I could think of that would let you test the theory that skill is a factor in day trading. It was an illustration of how someone with mathematical training might think about statistics like "80% of day traders lose money" without jumping to the false conclusion that all traders eventually lose money.
- thedevil 10y ago> There are professional day traders who earn an income over the long run by day trading. This is a true fact. Got anything to back up this "fact"? > The model I gave was the simplest model I could think of that would let you test the theory that skill is a factor in day trading. You can't assume the existence of skill proves the existence of long-term profits. Nor can you even assume that a good up/down ratio proves skill without considering the magnitude of the ups and downs or the impact of compounding.