Does trend following have an edge?

[Texasdj]

Quote from Visaria:

Yes, but only in a historical sense. There is no predictive power as to whether the trend of heads will continue (assuming a fair coin). Past outcomes do not influence future ones.

This is evidently not the same in a market where the decisions of previous buyers /sellers, as expressed by the price, have an influence on the decisions of future buyers/sellers.

Hmmm... have i answered my own question then?

Appreciate further discussion.

It exactly the same in the stock market Ask yourself this. How many moves in one direction increase the odds that the next move or series of moves will be in the same direction? If there is no answer. There is no edge. Any perceived edge is purely illusionary? Ever see a random number generated chart? Looks like trends there also.

 

[achilles28]

Quote from Visaria:

So you're saying that there is a statistical edge?

No, I didn't say that.

That's something you need to figure out, on your own.

That's what this journey is all about...

 

[Texasdj]

Quote from nLepwa:

Test it.

Most markets have a tendency to trend more than coin flips.
Test it and you will see.

Ninna

Any tests I have seen show zero trending behavior in stocks. Goodman tests for m dependent time series, serial correlation coefficient are all built to find trends. Run these tests on stocks and no trend exists. Can you name one statistical test showing trending behavior? I'm always open to new insight. Thanks.

 

[themickey]

Would this be enough to be a tradeable trend system?
Buying on green , selling on red.

Computer genererated algo I coded using Amibroker.



Uploaded with ImageShack.us

 

[Texasdj]

No offense but that chart has a striking resemblance to the coin flip chart linked below. Obviously anyone could make money trading a chart of the past

Here is a deeper explanation of the coin flip analogy from my professor friend in the big state:

http://clem.mscd.edu/~mayest/Excel/Files/Coin Toss Stock Prices and Chart.xls

If you don't believe the facts. That's your choice.

 

[Visaria]

From your professor's excel sheet:

"This workbook is used to show that coin tosses can generate charts that look very similar to the types of charts that technical analysts use to forecast future stock price moves. You will notice all of the same patterns as seen in normal stock (High Low Close) charts. This includes support and resistance levels, trends, and all of the familiar patterns (head and shoulders, triangles, etc). Just keep "flipping coins" until you see the patterns for which you are looking."

He's absolutely right that you can generate charts from coin tosses which look like market charts.

He therefore implies that since the charts might look similar and we know that the coin tosses were random, this therefore means market prices must also be random.

That is not a fact however. It's only a mere implication.

 

[stefan_777]

Quote from Texasdj:

No offense but that chart has a striking resemblance to the coin flip chart linked below. Obviously anyone could make money trading a chart of the past

Here is a deeper explanation of the coin flip analogy from my professor friend in the big state:

http://clem.mscd.edu/~mayest/Excel/Files/Coin Toss Stock Prices and Chart.xls

If you don't believe the facts. That's your choice.

So what are you doing here if it's all just a coin flipped random walk?

The only information a trader/investor has is from the past, no matter what method or theory they use. So if past information is totally useless, why even trade, why sign up to a trading forum?

 

[Texasdj]

Quote from stefan_777:

...,,, So if past information is totally useless, why even trade, why sign up to a trading forum?

Because edges exist in all markets. Trend following or charts are simply not one of them.

 

[stefan_777]

Quote from Texasdj:

Because edges exist in all markets. Trend following or charts are simply not one of them.

So you can predict a coin flipped random walk? That is the analogy you're using.

How can anyone have an "edge" in pure randomness? If that's really the case.

 

[Texasdj]

Quote from stefan_777:

So you can predict a coin flipped random walk? That is the analogy you're using.

How can anyone have an "edge" in pure randomness? If that's really the case.

It's not pure randomness. It's Quasi randomness aka low discrepancy sequences. since there are upper and lower parameters within the system of prices.

There are many edges but they change. Brights opening order strategy is /was an example of an edge used by many traders.

Trading has absolutely nothing to do with prediction. This is why most lose. Exploiting changing edges is how money is made.