Do you see patterns in Random Walks?

MAESTRO · Sep 15, 2011

Quote from rossky:

Thank you, MAESTRO.

I have an image of the school of fish and that giant flock of birds in my mind.

(www.ted.com Mathematician Steven Strogatz shows how flocks of creatures (like birds, fireflies and fish) manage to synchronize and act as a unit ...)

Since "... it's not entirely a prediction; it's more a reaction to a condition...." you JUST DO IT, don't think. Study the tendencies, research patterns, have a plan, but when you recognize certain conditions just act.

"Herd Mentality" really helps here too, I guess. Stay in a tight pack, react just like most of them in the pack will do.

It was mentioned by others here earlier in this thread. The book "SYNC" really helps to understand it better.

http://www.amazon.com/Sync-Order-Em...7214/ref=sr_1_1?ie=UTF8&qid=1316098244&sr=8-1

Colyn.Rosenthal · Sep 15, 2011

Quote from MAESTRO:

It becomes not chaotic at all. A rigid structure emerges like a layer of ice crystals over the puddle of water.

Whatever the reason may be, we all need a reason to act, wouldn't you agree? Thus the reason is essentially a prediction, a belief in a certain outcome.

It's not entirely a prediction; it's more a reaction to a condition

Before a pattern has emerged, could a group of people, that believes that a particular pattern must appear, grow larger and stronger contributing to the probability of a pattern to appear. Could the pattern itself attract another group that will make that pattern last.

Exactly. That is what we bank on when we enter trades

Because it all happens spontaneously we will never be able to predict when or where a certain pattern will appear and, because it is still governed by Randomness, we cannot be sure for how long it will last.

Right ON!

But we can be certain that a pattern will emerge. The word pattern itself implies that it is of a familiar "shape" thus giving us a chance to recognise it and ride on it for a while.

Precisely!

Cheers,
MAESTRO

It is so refreshing to see a cohesive and intelligent conversation about this topic happening on Elite Trader without the resident flamers showing up.

Thanks for helping others see what some of the rest of us see in our charts, data and markets.

MAESTRO · Sep 15, 2011

Quote from Colyn.Rosenthal:

It is so refreshing to see a cohesive and intelligent conversation about this topic happening on Elite Trader without the resident flamers showing up.

Thanks for helping others see what some of the rest of us see in our charts, data and markets.

It is my absolute pleasure to share my thoughts here. I would be delighted if my humble efforts could ignite an interest in this subject even in a very few people. One of my goals in life is education. I would be so pleased if I could make even smallest contribution to this cause and help in any way to make somebody interested in math psychology and philosophy.

Cheers,
MAESTRO

SunTrader · Sep 15, 2011

Quote from SunTrader:

That originally was asked by - Edward Lorenz, circa 1972

"was an American mathematician and meteorologist, and a pioneer of chaos theory. He discovered the strange attractor notion and coined the term butterfly effect".

zedDoubleNaught · Sep 15, 2011

Quote from rossky:

...

Before a pattern has emerged, could a group of people, that believes that a particular pattern must appear, grow larger and stronger contributing to the probability of a pattern to appear. Could the pattern itself attract another group that will make that pattern last.

Because it all happens spontaneously we will never be able to predict when or where a certain pattern will appear and, because it is still governed by Randomness, we cannot be sure for how long it will last.

...

Is there any research or theories on the adoption rate of jumping on to the pattern? Or, the rate at which the flock wholly turns left, from the earliest left turners to the last few? Surely, they don't all do it exactly at the same time, there is probably some distribution curve to describe it.
Example, birds are too fast for me, but I saw on Planet Earth, in E Africa they have a trick of 3-4 men walking calmly straight towards a pride of lions after they catch something. First, one lion gets spooked and runs away, then 2, then a bunch, then a declining amount til the last one runs away.
I don't know, but when I watch tick data, it looks like logit curves but flipped around the x and y axes. Maybe this reflects an adoption rate, or a CDF of the adoption rate distribution curve.

rossky · Sep 15, 2011

Quote from MAESTRO:

It is my absolute pleasure to share my thoughts here. I would be delighted if my humble efforts could ignite an interest in this subject even in a very few people. One of my goals in life is education. I would be so pleased if I could make even smallest contribution to this cause and help in any way to make somebody interested in math psychology and philosophy.

Cheers,
MAESTRO

MAESTRO,

Since you mentioned math psychology and philosophy, can I trouble you with this?

"Third time is a charm." How that works?

Here is the basic pattern. In a non-trending market you see a lot of two-legged moves. And I don't quite understand why only two.

The second leg is a "test" of the previous extreme. And, if the price fails to go beyond that level it will most likely reverse. There will be a Lower High, Higher Low and that's how a head-and-shoulders pattern is created.

It seems to me that the First move (Leg) just happens - spontaneously, confluence of random forces in place strong enough to make it happen. The Second Leg, many pile in recognizing the direction. The Third time is indeed the test.

---
Thank you for recomending the "SYNC" book. It would be great If you find time to this post. Thank you.

Samsara · Sep 15, 2011

Quote from MAESTRO:

I understand and respect that. However, there is a few very powerful and extremely useful implications of accepting the randomness as a necessary and objective component of life. ... Once you accept a premise of its universality there are significant advantages in terms of understanding and predicting behavioral patterns observed in the markets. The most powerful of them is the new form of Galton's regression law that exist regardless of so called "free will" of traders.

I try not to take a contrary role without delving further into the reading you and another brilliant poster have provided.

I'd only suggest that -- so far in this thread -- it's only been demonstrated that randomness, according to your initial definition, has utility in building profitable models for identifying certain stable patterns. Much argumentative work would have to go into leveraging that utility to explain all behavior.

Samsara · Sep 15, 2011

Quote from Samsara:

I try not to take a contrary role without delving further into the reading you and another brilliant poster have provided.

I'd only suggest that -- so far in this thread -- it's only been demonstrated that randomness, according to your initial definition, has utility in building profitable models for identifying certain stable patterns. Much argumentative work would have to go into leveraging that utility to explain all behavior.

Also just to reiterate this stuff remains incredibly fascinating to me, and the behavior you've described makes sense in an elegant way. I'm grateful you've broken your reasoning down to offer other fruitful ways of looking at this subject.

MAESTRO · Sep 15, 2011

Quote from rossky:

MAESTRO,

Since you mentioned math psychology and philosophy, can I trouble you with this?

"Third time is a charm." How that works?

Here is the basic pattern. In a non-trending market you see a lot of two-legged moves. And I don't quite understand why only two.

The second leg is a "test" of the previous extreme. And, if the price fails to go beyond that level it will most likely reverse. There will be a Lower High, Higher Low and that's how a head-and-shoulders pattern is created.

It seems to me that the First move (Leg) just happens - spontaneously, confluence of random forces in place strong enough to make it happen. The Second Leg, many pile in recognizing the direction. The Third time is indeed the test.

---
Thank you for recomending the "SYNC" book. It would be great If you find time to this post. Thank you.

At the risk of disappointing you I think that your example (hypothesis) is too literal. I would stay away from the "reasoning" behind the chart patterns; it's a bit of a stretch to me.

MAESTRO · Sep 15, 2011

Quote from Samsara:

I try not to take a contrary role without delving further into the reading you and another brilliant poster have provided.

I'd only suggest that -- so far in this thread -- it's only been demonstrated that randomness, according to your initial definition, has utility in building profitable models for identifying certain stable patterns. Much argumentative work would have to go into leveraging that utility to explain all behavior.

Agree. It wasn't my intention to suggest that everything could be explained using randomness. I was merely trying to state that randomness is an objective quality of nature, and not a subjective utility used for modeling the reality. And, of course, it is just my opinion. I do not have a complete proof of this hypothesis, however, accepting this premise helped me a lot and I was hoping it could help others.