Predicting randomness

This game makes no sense.

It is obvious that at all time, each share's "Fair Value" is $.09 (in theory there is $900 chasing my 100 shares at time Tzero, so if I want everyone's money I have to make sure that I don't sell them for less than about .09 at time Tzero. By symmetry that condition holds for everone else too). Why would anyone bid more than $.09 for shares at time Tzero, and why would anyone offer their shares for less than $.09? In a real stock market, value is almost never based purely on psychology as earnings and dividends and book value eventually enter the equation (as well as things like how much my money can earn in a risk free asset.) How does this game even get started? The only way this game can get started is if someone breaks the symmetry and bids more than .09 or offers their shares for less than .09 for 1 share, at which point FV may change dynamically for those shares, but FV is always apparent - something that is clearly not true in a non-closed system like a real stock market.

Furthermore, if someone ends up with all the money, why is that considered winnning? What happened to all the shares? Do you mean he ends up with all the money and all the shares? In a real stock market someone may have all my money but I have all the shares which means I can easily convert my shares back to cash assuming a liquid market and a non bankrupt company.

My guess is you left something out.

nitro

PS - the way I would do it would be to set up an options market on those shares witha nice spread and act as a market maker :D

Quote from kjkent1:

Whether the market is or is not random is irrelevant to your ability to make money trading. The only thing that is required from the market is price movement. The more price movement there is, the more money you can make.

I'm probably gonna catch all sorts of flack for this post, but consider the following little game:

Take 10 persons and put them in a room. Give each person $100 and 100 stock certificates. Now tell them to trade with each other.

Each time a trade is made, the traders record the price and shares on a chalkboard in the room, so everyone can see what happened.

Now, the question is: how do you accumulate all of the money in this little trading game over the long run (i.e., without cheating)?

The answer to the above question is surprisingly simple. And although, there are a couple of ways to win this game without cheating, there's only "one" way to win by doing nothing other than trading with the nine other people in the room.

Figure out the answer, and you're a trader. Until then, you're a gambler.
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Quote from oddiduro:

I submit that the markets are indeed a random walk, yet tradeable. The success comes in managing the risk, and not the outcome of the trade.
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A Random Walk on Price (even one with a positive bias) can go negative.

Most markets can only go to zero.

Many markets cannot go to zero.

Most market prices cannot be random walks.
 
Quote from danoXP:

A Random Walk on Price (even one with a positive bias) can go negative.

Most markets can only go to zero.

Many markets cannot go to zero.

Most market prices cannot be random walks.
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I am not convinced this argument holds true.

For example, given that (some) makets tend to rise naturally because of rules that make it hard to sell them, once you take the coordinate transformation into that coordinates system (the "axis" are no longer time/price but functions in some abstract non-commutative space), prices may indeed be locally random.

What is really interesting is that prices can be locally "random" on that manifold and still have global statistics that have a stable attractor, until something comes and knocks them out of that trajectory.

nitro
 
Quote from ORM:

Most people seem to forget that the long term bias of the market is up. Therefor the easiest way to trade trend would be on the upside.

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ORM
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Fooled by Randomness?

What "market"? I assume the US equity market? Measured in what way? The DJIA? the SP500? the NASDAQ? none of which existing in its current form 10 years ago? ... even with surviorship bias you are talking about maybe a 100 year time period on the DJIA. You would define an upward bias with 100 data points?

When the automobile was invented, if you had bought all the auto maker's stocks equally, would you have upward bias today?

Similarly, when the telephone was invented, and you equally bought all the independant telephone companies (before their consolodation and regulation). Would you have upward bias today?

Think Railroads.

Think power companies (the lightbulb).

Think the computer! (DEC, Data General, Wang, Sperry, Univac, Tandy, IBM, Prime, Sun, Apollo, Metheus, Apple, SGI, Amdahl, etc.). Was there upward bias?

Now think the Internet. Of the hundreds of IPOs in the late 1990s. Was there upward bias? Did you pick only Yahoo, Amazon and Ebay? If you threw $ at each IPO equally ... would you have upward bias?
 
Quote from Pekelo:

A prediction is nothing more than an educated guess, based on previous information. Now, if you give me a guy who just makes random guesses, but he has a 75% correctness ratio, I will take him! :)

But you have been sidesteping my arguments, so here is for the last time in short:

Let's say 3 out of my 4 predictions tend to be good. Than you can say the probability of my average prediction is 75%. That is way higher than what you would get just by randomly guessing, thus :

1. I must have an ability to predict or
2. I am an incredibly lucky guy and should play the lottery.

Since I don't belive in long term luck, I vote for #1. As long as you can not come up with new arguments, I am done with the discussion....
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My response is the error in thinking in small numbers and the resulting overconfidence that it brings.

In other words, is your representative sample large enough? Have you been correct 75% of the time for say 10 years, or mere 10 months.

Something to consider.
 
Uhh, if you are 'betting the farm' then you will certainly blow up some day. You should always hedge your bets and limit your downside.

Quote from oddiduro:

My trading is just as random as yours:D

But how do I, or you, really know? Maybe it just works right now. Maybe I will blow up today, especially if I bet the farm on that test of support on lower volume that I know is coming today...or is it higher volume:confused:

Anyway, as another poster posted, there are so many variables that we cannot possibly know them all. Even if we did, would we know what the outcome of the interaction of said variables would be??
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Quote from oddiduro:

My response is the error in thinking in small numbers and the resulting overconfidence that it brings.

In other words, is your representative sample large enough? Have you been correct 75% of the time for say 10 years, or mere 10 months.

Something to consider.
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My response would be the error of projecting one's failed attempt to time intraday or short term price movement of a broad stock index to conclude that all price action is random. An index of 500 companies whose daily volume is made up in large part to hedgers and options games would just as well appear to be completely random. Compare that to the stock of a relatively unknown company slowly taking market share from it's competitors and being quietly accumulated by several large funds.

But the question of randomness aside, you might want to consider why you would ever need to have a sample of any method working for so long as a decade, and why you even have an assumption that such a thing exists in the first place. If a single static condition that produces profits over such a long period of time is the goal of your search, then yes you are probably doomed to fail, because markets in essence are all about changes in perception and expectation. After all, do you really think markets should move dependably because of some chart pattern anyone with access to a data vendor can see?

Just because something works for a certain period and eventually stops working does not make it random. Just because markets seem to make moves that defy logic does not make it random. Given the right perspective on markets, these results should be expected. To only conceive that markets should do X because of event Y is like sitting at a poker table and just playing from your own hole cards and considering nothing else; you might succeed consistently with the weakest opponents but you'll never last long otherwise. Markets are not predictors or mere reactors to random events, they are constantly changing discounting mechanisms. We as individual traders may not have the capability of knowing "why" price moves until after the fact, but that's no reason to resort to randomness to "disprove" the reason's existence in order to make us feel better about our shortcomings.
 
Quote from illiquid:

Compare that to the stock of a relatively unknown company slowly taking market share from it's competitors and being quietly accumulated by several large funds.
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Right.

To me, the logical extension of the random walk theory is a grander, 'everything is random' theory, which suggests that companies 'slowly taking market share' from their competitors are doing so randomly, that there is no cause and effect operating, and that the efforts of the entrepreneurs whose ideas are successfully realized are actually 'random' events. All achievement then becomes random, and not the result of directed efforts by active agents. I don't have the theoretical chops to describe what I am feeling, but I just keep coming back to this question - how is the movement of the company illiquid described, or the cotton market during a period of blight, random??

The weather may be random but human responses to it are not.

And it doesn't do any good to say that there are 'periods' of non-random behaviour but that the overall market is random. Once you admit that there is causality in the markets, every move must be seen in those terms.

I can't tell you how bizarre this whole idea of non-causality in the markets seems to me.

This argument seems to me to be akin to the one about religion or pro choice/pro life. People, including me of course, hold their beliefs and there isn't much that can be said that would change anyone's mind. This is so bizarre because an objective analysis disproves the random walk theory so easily :):)
 
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