A message to some day traders.
- Thread starter Amahrix
- Start date
I have a question that may have already been asked and answered in this really long thread but I couldn’t find it.
How can trends (uptrend, downtrend, sideways) exist at all in price movement regardless of short term or long term if market movement were totally random?
Wouldn’t price charts just be a jumble of disconnected price points if it were totally random?
How can trends (uptrend, downtrend, sideways) exist at all in price movement regardless of short term or long term if market movement were totally random?
Wouldn’t price charts just be a jumble of disconnected price points if it were totally random?
The truth of the markets is as simple as a series of data where the value of obs{n} = obs{n-1} + [N(µ,σ)random_component]... If you graph that on a spreadsheet, you'll come out with something that looks much like a financial market.
• notice that the starting value is yesterday's actual.
• notice that the adder is a symmetric Normally-Distributed value with a Central Tendency to µ ±σ.
If the markets were "totally random" as you've heard (and read in this very thread), they would indeed be a mass of disconnected price points, and you are 100% correct and have just voiced "wisdom" beyond a sadly-large number of traders, ET-members, and market-opiners-at-large.
Our job in seeking any available "edge" is to try to milk that random component for any excess of systematic, NON-random content that happened to get lumped in there. (For example, "trend.") A convenient and wide-spread summary of this idea is termed "time-series decomposition" and would appear in pretty much any first-exposure stat book.
Lastly, to really have this sink in, learn/know the Gauss/Markov Conditions, and recognize how they are routinely violated in financial-series data. And the next time that somebody mumbles "...but the markets are random..." -- you will find yourself rising out of your seat, .......
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Is obs{n-1} a good predictor of obs{n}, like you mentioned in @padutrader's thread on randomness?
Crude once, several currencies, Nat Gas, Electricity was probably the nuttiest, several equities (individual issues- I mean sheesh, there is always some issue doing something nutty somewhere)... sprinkled in are some monster moves in other products.
Not really sure what qualifies as Black Swan, but anyone long or short enough wings in any of the above would probably agree. - Those were just the ones I had positions on.
Of course there is always something doing something nutty.
And there is also almost always someone hitting Powerball/MegaMillions/etc out of billions of tickets sold.
Can't help you any further if you don't understand my point.
So you're telling the guy who won Powerball a few times that you can't help him. I guess you missed the point as well.