StockFetcher Forums · General Discussion · The Rise of the Machines<< >>Post Follow-up
4,599 posts
msg #113293
Ignore Kevin_in_GA
5/10/2013 4:16:40 PM

Excerpt from an article by Mark Hulbert today on www. ...

Terrance Odean, a finance professor at the University of California, Berkeley, has extensively studied the behavior and performance of individual traders. He points out that there used to be another human being on the other side of the trade when an individual bought or sold a stock. “Now it’s a supercomputer you’re competing with,” says Odean.

“Individuals are no longer playing against Grandmasters; they’re playing against Deep Blue,” he says, referring to the famous battle in the 1990s between chess’s Grandmasters and International Business Machines’ supercomputer Deep Blue. Individual investors “will almost certainly lose.”

Another reason traders are losing out to machines is their general inability to assess complex data. They look at the same set of facts on different occasions and reach different conclusions, and they unwittingly let their emotions dominate their intellect.

Daniel Kahneman, professor emeritus of psychology and public affairs at Princeton University and the 2002 Nobel laureate in economics, has widely studied this phenomenon. In his 2011 book “Thinking Fast and Slow,” he reviewed more than 200 academic studies over the past five decades that analyzed head-to-head contests between human beings and mechanical algorithms.

Kahneman reports that man consistently loses out to machine in a wide variety of pursuits, ranging from medicine to economics, business, psychology and even things like predicting the winners of U.S. football games and judging the quality of Bordeaux wine. In each of these domains, he reports, “the accuracy of experts was matched or exceeded by a simple algorithm.”

I read this and it resonated with me. Personally, when I look back at my least profitable periods of trading, I had no validated strategy that I could use to help guide my investment decisions, and when I got in trouble I consistently made emotional decisions that led to further losses. For me, that was an expensive tuition to learn an important lesson - have a clearly defined strategy before putting your money into play, and do not deviate from it. Ever.

I would love to hear others' thoughts on this.

834 posts
msg #113295
Ignore marine2
5/10/2013 8:01:39 PM

Investing in stocks can be very frustrating when even though you have done your homework, crossed your T's and dotted your I's as far as finding a sound, strong company, in fundamentals, and having the right technical elements in expecting a very good chance to see a rise in it's stock price, yet after you buy its stock shares you see its share price plummet like a rock for no apparent reason. Things happen behind the scene that makes even the most sound investment seem fragile. But, if you buy multiple companies using the same sound stock picking methodologies against a positive stock trading atmosphere you are hoping that you get at least 66 2/3% win success. And your loss in dollars are not greater than your grand total investment.

Creating filters that will give you the winning edge is quite the challenge. Where you think a particular filter looks so good that it can not fail turns on you and kicks that theory out the door sure makes us eat humble pie from time to time.. The human emotion factor comes into play most often and does create situations where you either don't make the money you should have, or you could have saved a bunch of money by exiting earlier than you did, from a particular filter. Knowing how to control your emotions in deciding when to enter the market and when to exit the market equates to big money.

Pay attention to news events that would create stock trading problems or opportunities, pay attention to the SPY (S&P 500), and QQQ (Nasdaq). If they are going up, in a happy investing atmosphere that should spell green light for you to do the same. On average there should be 4 ripe opportunities to play the market inside each year. Have a financial plan. Know how much money you need on each transaction to make money. Every stock price dictates a different investment situation. With all these variables involved creates quite a bit of mind involvement on your part. Maybe this is why we love being involved in this exciting stock investment game.

Good luck to each of you, happy investing!

4,599 posts
msg #113298
Ignore Kevin_in_GA
5/10/2013 10:32:28 PM

I think we are in two different philosophical camps here, but that's fine. The article points to the fact that the human mind often makes different choices when confronted twice with the same data. An algorithm always makes the same choice when presented with the same data, and hopefully takes advantage of a statistical edge.

I'll probably not dissuade you from your position, and vice versa. After all, somebody has to be wrong in order for you (and hopefullyy not the other guy) to make money.

834 posts
msg #113302
Ignore marine2
5/11/2013 12:54:00 AM

As they say, different strokes for different folks. :-) If the true, so called experts, managing peoples accounts have trouble figuring out when to get out and keep their clients powder dry why would we think we would have the Holy Grail of knowing when to make the right decision every time. Yes, there are now computers managing accounts and those robotic minds make decisions without emotion or fear, they just analyze the data before it, does its calculations then decides what to do in a split second if not sooner. NYSE recently had an incident where someone created a false story about a bad situation in Washington DC and the computers reacted on it and had sell transactions from that news. It created a little bit of turmoil, to say the least, in the market place but because there are better, not perfect , safeguards in the electronic system at the trading centers the problem got nipped in the bud. This robotic buy and sell actions could be a future problem if our systems experts don't pay attention and keep vigilant in safeguarding.and have stringent rules and processes in place to protect our money.

287 posts
msg #113305
Ignore novacane32000
5/11/2013 9:28:46 AM

Who does the trading for JPM? Just heard they had zero trading loss days last Qrt . GS had just 2 trading loss days.
Gotta think computers are running the show there.

27 posts
msg #113307
Ignore dknoonan
5/11/2013 1:28:07 PM

This makes me wonder about the long term viability of individual technical traders. At this forum we spend time finding an edge with technical analysis. What edge can we come up with that cannot eventually be discovered and implemented with software by companies with deep pockets? The computer probably will get in and out of trades with better timing than we humans can. Our edge becomes flat. Is this a plausible future that makes our efforts here a bad bet?

834 posts
msg #113309
Ignore marine2
5/11/2013 2:05:07 PM

It would be nice someday to be able to subscribe to computer software to play with the big boys. Have our brokerage houses that serve us provide the ability to play with the big boys having safeguards built in to let us sleep soundly at night. Yes, I am always looking for that edge but hey it means staying on dry ground and being happy too.

4,599 posts
msg #113312
Ignore Kevin_in_GA
5/11/2013 4:16:05 PM

The key is to use algorithmic trading to avoid human error, but only on time frames where the big boys do not play. Most of the algorithmic trading done today is at the sub-second time frame, where none of us can compete. Let them play there.

On the other extreme, institutional investment firms typically hold trades for weeks to months, usually based on fundamental analysis. That's fine as well. Not what I am interested in.

I'll stick to swing trading where simple robust systems will continue to give the individual trader an edge.

185 posts
msg #113315
Ignore fortyfour
5/11/2013 5:29:45 PM

I am hoping that simple systems used together in the appropriate market (chop/bull/bear)
will continue to provide swing trading opportunity. I haven't tested this but I would think in the present market
over thelast 11 month bull run ( and in many periods) that Kevin's Zscore system and Divergence system used together
would do nicely. Curious if you looked at this Kevin.? Combined equity ciurves etc..Seems that Zscore trades cluster as the williams(16)
goes in the mud and later , after exiting the Zscore system , the Divergence system kicks in as the trend begins and continues
to take advantage of market trend conditions until the trend in the stock stops. This is looking at the divergence system on the sp500 also.
I do like the way the divergence system shuts off (but not understanding why yet) for each stock . The system itself
seems to keep your picks coming only in good conditions for the stock without using general fitted trend indicators.
But, regarding the topic of this thread..... I have to do only what I can execute and manage consitstenly on the most
busy and demanding work and family days. That has to be nightly signals and limit ordering in a limited amount of time.
Sure I have time to put into this on weekends but it is no good to me if I cannot recognize and take opportunities each day.
Not a customer yet Kevin , but looking at your site, and will most likely be interested in the Pangolin Z system.
It is unbelievable what you generously do here....

749 posts
msg #113316
Ignore miketranz
5/11/2013 6:08:47 PM

We're playing against inside money.They're there very simply,to take your money and they do a good job of it.The market's set up for that purpose and that purpose only.In my opinion,every move the public sees and acts on,charts,news,investment advice,is a counter move against them.The public buys into the hype(greed)always at the wrong time.Inside money sells into greed,buys into fear.They are always loaded up on the opposite end,the other side of the trade.That's what makes the game so confusing and difficult to comprehend.....

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