Predicting randomness

[oddiduro]

Quote from nicholaf:

you just contradicted the theory of random walk - it assumes that market agents are rational. since we know that is not the case, the argument for random walk falls apart.

I do not support nor oppose random walk. I do believe that markets are largely irrational.

 

[nicholaf]

Quote from oddiduro:

Why do use assume that random walkers don't make money?

In a random market there is an infinite number of ways to make money.

Managing risk is the only way to KEEP it, though.

The black swan will get you....be patient.

random walkers make money. if they buy a stock today and it loses 50%, then they'll just have to keep on increasing the holding period until it does.

simple

 

[oddiduro]

Quote from Pekelo:

If you really think there is no such a thing as trend and you don't have a trendless (randomwalk) strategy you might as well close the shop and stop trading. But of course markets trend and they are not random.

Just because YOU have been unable to predict the market, that doesn't mean others have the same experience. Even if only 10% of traders are successful at predicting the markets, that doesn't mean that the markets are random, rather than prediction is a hard business...

What if we pick a pattern that has let's say a 71% success ratio?? With good money management, you should be able to make money 7 times out of 10 using that particular pattern...

What if we pick a guy who can predict the markets about 80% of the time? Would you call him just lucky, or would you agree that for some people it is possible to predict the markets?

Markets, trends and certain moves are predictable, but not for everybody and not all the time. I think most people (like you too) make the mistake of expecting predictability ALL the time. Some patterns and indicators work only under certain circumstances, maybe on rare occasions, nevertheless they work, even if they are quiet most of the time...

I have a longer term indicator, it only kicks in 8-12 times a year, but its success rate is over 80%...

So, is your indicator accurate 8 out of EVERY 10 sequences. Your indicator may give false signals 2 times out of 10 for 10 consecutive sequences and then be right 80 times in a row. This is still 80% accuracy, but with radically different effects to your bottom line.

 

[oddiduro]

Quote from Equalizer:

Hmm...
Mr Dow, did you ever meet Mr Proflogic? That is almost Carbon Copy proflogic - with perfect now having been replaced by flawless in the text.

Nice bit of NLP.

Perfect Randomness perhaps?

Or perhaps a black swan

 

[illiquid]

With the assumption that people trade ultimately out of greed and fear, there is no reason to even begin with the notion that the markets are random.

Randomness is an illusion working on 2 separate levels: ignorance and obfuscation.

Imagine 2 birds chirping at each other. The noises they make appear to be random to us, we question if they are even communicating anything meaningful. This appearance of randomness is borne of ignorance (we don't speak bird-talk).

Now imagine 2 people reciting line from a play on stage. We understand the story perfectly. Now imagine 500 other pairs of people also reciting lines from a play, but not in unison. We can barely make out what is going on, the crowd noise in effect is indecipherable, we cannot even tell if it's the same play at all since they all started at different points. This appearance of randomness is borne of obfuscation.

The markets operate under the same masks of randomness. Why would anyone ever consider price action random, if not out of laziness or resignation? Where does this concept of market randomness even come from? A good earnings report comes out and the stock subsequently falls -- are events like these the impetus behind people calling market action random? Just some "random" thoughts.

 

[Grob109]

See attached.

 

[nicholaf]

Quote from illiquid:

With the assumption that people trade ultimately out of greed and fear, there is no reason to even begin with the notion that the markets are random.

Randomness is an illusion working on 2 separate levels: ignorance and obfuscation.

Imagine 2 birds chirping at each other. The noises they make appear to be random to us, we question if they are even communicating anything meaningful. This appearance of randomness is borne of ignorance (we don't speak bird-talk).

Now imagine 2 people reciting line from a play on stage. We understand the story perfectly. Now imagine 500 other pairs of people also reciting lines from a play, but not in unison. We can barely make out what is going on, the crowd noise in effect is indecipherable, we cannot even tell if it's the same play at all since they all started at different points. This appearance of randomness is borne of obfuscation.

The markets operate under the same masks of randomness. Why would anyone ever consider price action random, if not out of laziness or resignation? Where does this concept of market randomness even come from? A good earnings report comes out and the stock subsequently falls -- are events like these the impetus behind people calling market action random? Just some "random" thoughts.

very true. and the whole random walk theory was created through assumptions such as the price as a martingale, etc. but the evidence suggests otherwise, positive autocorrelation in even a simple AR(1) model. Further, volatility is not constant, and not stochastic either. so the point is that i agree with you that it maybe simply the academic's way of resignation of not finding a reliable way to trade the markets

 

[Grob109]

Quote from rols:

Strangely enough I was reading about this today. There was TV program about some students fro MIT who made millions from developing a card counting system.
http://www.bbc.co.uk/sn/tvradio/programmes/horizon/million_prog_summary.shtml

What is card counting?
Card counting has nothing to do with remembering every card that has been played, that's more a feat of memory. Although the card counting systems take many forms, one of the most popular and simplest is the high-low count. Each card is assigned a positive, negative or neutral value:
• 2, 3, 4, 5, 6 = +1
• 7, 8, 9 = 0
• 10, J, Q, K, A = -1
The player keeps a running total of the count, adding or subtracting as each card is played. The player raises their bet according to the positive strength of the count. The count also determines how to play each hand. For example, if the deck is strongly positive the player is more likely to draw face cards, so may profit by playing a more cautious strategy.

If you use the 5's count, the measure of you rate of success is how frequently the cricket is used to change your dealer. Three times in 45 mins is a good rate of dealer change and those at the table will not be liking you nor friendly.

 

[Equalizer]

Quote from oddiduro:

Or perhaps a black swan

As long as its "perfect", or"flawless"

PS. I eat black swans for breakfast, or is that black boxes ?!

 

[Pekelo]

Quote from oddiduro:

I do not support nor oppose random walk. I do believe that markets are largely irrational.

We all have to agree on the irrational part after the tech bubble. But being irrational is not the same as unpredictable. Quite so, when the tech bubble was raging (or the housing bubble now) we (well, the more rational of us) all knew/know that it had to/will end eventually.

But just because I am curious, what would you expect as evidence for predictability?? What is an acceptable proof for you?


Let's say somebody provides you with a bunch of predictions and they have a high success rate (what % would be high enough for you?), would you acknowledge that market prediction is possible???

With good money management even a 60% correctness rate is good enough...