i want to understand this

Originally posted by feens93129


The answer is no. As an example you can look at the roulette tables in Las Vegas. They did not build those huge Casinos by allowing people to figure out ways to beat the system. Basically you can hit black or red and then there are two green numbers. By removing the greens the odds are exactly 50/50. Black could come up 50 times in a row and on the 51st spin of the wheel the odds that black come up are still 50%.

What most people get confused on is they see that black has come up 9 times in a row and figure the wheel has to stop on red pretty soon. The odds of black coming up 10 times in a row is almost 1 in 1000. People look at this and actually use this to determine their bet. In reality it is a sucker bet as while the odds are 1 in 1000 that black will come up 10 times in a row, the odds it will hit black on the next spin are still 50%.
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I'd like to add this : each event (spin) is independent of the previous event. No matter how many red or black that came out before, the next spin will have 50% of chance giving red or black. The casino doesn't count of red/black (vs. people betting on red/black), but it counts on Zero or Double Zero, whick are neither red nor black.

I don't think the market is random, because it's price dynamic is created by human behaviour : greed and fear.
If we have computer trading the stock market, it will be very boring, with all stocks having P/E = 0
(or should I say Vulcan... because the computer softwares are written by human, no? :D )

Cheers!! :p
 
Originally posted by Gordon Gekko

that was a good explanation...thanks.

will you take the next step and try to explain the stock market? ;)

by that, i mean...if you were to find the #1 stock in the nasdaq with the most number of down days of the last 100, would that influence you to go short? would it make you hesitate to go long? what i want to get at here is... in the 50/50 example, we know what the probability is. how do you handle the stock market? if we figure out what % of the last 100 days are down, can we get from that some type of probability for future trades? or are past results not indicative of future results? would there be some value or no value at all? if there is no value at all to that, what kinds of entries can their possibly be that are actually better than random?

this will lead me to my next question... if we can say that previous price movement does not necessarily predict future movement, why do people like to find trends? could they not just end as soon as you get in? same goes for chop....say you have 2 trading systems, one for trending and one for chop. what is the point of switching systems when you have no idea if chop or trend is going to happen next?

for the record, i do not believe the markets are random. as i've said previously, i think markets are chaotic systems. that being said, how the hell do you deal with it? i've learned to not make predictions. i also accept that anything can happen at any time. however, after knowing this, what can you do? what kind of entry can be good if we have no idea what is going to happen? i know you would go with the highest probable entry, BUT HOW DO YOU DETERMINE WHAT IS HIGHLY PROBABLE WHEN PREVIOUS PRICE DOESN'T PREDICT FUTURE PRICE? as in the example of the stock with many down days, if we can't use that to find a good short entry, what CAN we use to find a good entry?
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First, I will state I am currently not an active trader and am also seeking a method to effectively learn how to trade.

Gordon, It appears you are somehow attempting to take the original question and somehow apply it to the stock markets. It is an exercise in futility.

The question posed is based on simple mathematical principles in an environment that does not exist. In other words the question is more for discussion than something that will actually benefit you in developing a system to trade. I say this because the question revolves around a completely random environment and we both agree the markets are not completely random, therefore the question is useless past its basic mathematical principles.

Don't get me wrong, it is always good to seek knowledge and understanding, but in many instances what is learned has no relevance in application.

Using the original question and your follow up regarding the #1 stock in the NASDAQ with the most down days out of 100 days. No, it would not influence my decision one way or another as the odds would be exactly 50%. If you take 50 pennies and flip them each one at a time and each time one turns up heads you disqualify it. Eventually you obtain the one penny that has turned up tails more than any other penny and is the only penny not disqualified. This is much like your #1 stock as far as down days, it is the only penny that has survived. The odds it turns up tails on the next flip is still 50%.

To answer your question regarding why people follow trends. Simple, the markets are not random and they use multiple indicators to determine which direction a stock is likely to move. Your questions revolve mainly around the use of a single indicator. Obviously not guaranteed, but by using multiple indicators they feel comfortable with, they attempt to gauge future direction. Then they use risk management techniques to cut their losses and allow their winners to run. In some systems it means they must be right a high percentage of the time in regards to price movement, in other systems they can be stopped out several times, but when they are right the profits are enough to offset their losses.

Past price predicting future price is debatable, but some would state past prices can form support and resistance levels, therefore supporting the notion that when a past price is reached the future direction can predicted with a higher probablility of success.

As stated above I am not an active trader, but hopefully my answer will help a little.

 
Originally posted by Gordon Gekko
forget real trading, i just want to understand this concept.

let's take a truly random event, meaning the outcome of the last trial has no effect on the current trial.

say there is a stock that is either up or down and the probability is always exactly 50/50. is there any difference between going long when there are 20 up days in a row (uptrend), 20 down days in a row (downtrend), or 20 days of alternating up and down (chop)?

i would guess the answer is no.

i know i've mentioned this post a few times, but i think it's a great question:



as i said in my above quote, if you should not make a decision based on information like that, what's the point of using the slope of a moving average? or what's the point of looking for trending price?

some people have said to have 2 systems, one for trending and one for nontrending. but what is the point of that if you have no idea when one is going to start or end? if looking at historical prices doesn't matter, why would you switch to a chop trading system when you see chop? it could just start trending after you switched. so then you switch to a trending method and chop could occur! i want to know if looking at previous price movement should influence your decision at all for how you would go about making a trade.
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Your reference to people having two systems, one for trending and one for none trending markets might be confusing people. I use one system that automatically adjusts to trending or non-trending behavior in the market. I don't switch between two systems, the single system adjusts itself to trending or non trending conditions based on price behavior.

How can a system recognize the difference. Simple. Take any period 10 minutes, 10 hours or 10 days. If the market is close to where is was 10 periods ago. It is non trending. If it is far away from that point it is trending. The system uses different entry and exit criteria during each condition. Do not confuse directional movement with volatility they are two different beasts.

Think of the market as a car. Sometime its just cruising aimlessly around the neighborhood at 20 mph like the driver is lost and looking for a house, then occasionally it just takes off out of town up the highway at 100mph, it's off with purpose. It knows where its going and it wants to get there fast. Kind of like when you take of for your summer holidays after the last day of work. If the car is travelling in one direction at 100mph, it is highly likely that it will take a while to slow down. It can't pull up instantly.

Runningbear
 
G.G.

A better thread would simply be trending or not trending. This notion of caring about the ratio of down/up days is insane. Even if the distribution of higher vs. lower closes was random(and to a degree it is) the AMOUNT the market moves is what is important!By your way of thinking +2,-15,+2, is an uptrend because there have been twice as many positive net closes. I remember telling a friend once, "I'm on fire, I've made money 15 days in a row." He replied "what kind of a asinine stat is that, you can lose all of it and more on the 16th day." This isn't a coin flip, it's the spread on a football game. The outcome of the trading session, whether positive or negative has a coefficient assigned to it!Get off this simplistic number of days shit!
 
The stock market isn't random because it's interconnected. A trend in stocks causes events like "short-covering" to perpetuate the trend, where coin flips are independent of the previous flip, and so therefore maintain perfect randomness (all things being equal). A balanced coin and consistent flip, with enough samples, maintains a normal bell curve distribution of results, where a stock constantly has a skewed bell curve distribution, and rarely a normal curve. A stock in an uptrend has a positively skewed bell curve, where a coin in an uptrend has a normal distribution.

So figure out the "skew" and start making money.:D :D
 
Gordon I like to think of the market not as a ball bouncing down a rocky slope in random directions but as a living thing with a thought pattern behind it. The problem is that thought pattern is usually fragmented. Like 20 people pulling on a rope but not knowing which direction to pull. At times they are pulling the same way but other times not. I try not to pull the rope unless it seems like we are all pulling the same way. Remember the market is made up of people trading, try to see what they see. I don't know if you are trying to swing or day trade but sometimes it helps to just watch the market flow for a while. don't try to rush a trade. Maybe watch the same stock for a while, you will start to notice how it reacts as it reaches highs and lows intraday. Pay a lot of attention to reversals, breakdowns and breakouts. You will start to notice patterns forming at certain price levels. This is also happening on longer time frames but is a little more dangerous to play during this crazy market. It has taken me a long time to realize that being patient is a really important part of trading. Nas :)
 
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