Predicting randomness

[downtickboy]

Quote from Charlie Dow:

Trends do not exist before they occur, they are created in real-time. Once they are created, they exist until they change. We know a trend is in place by reading those extreme tops & bottoms in our confined trading environment.

Trends are established when 3 extreme points in that confined environment confirm; either 3 points confirming a Bull or a Bear. Prior to the creation of that trend, price is either in a corresponding Trend or transitioning. By tracking the sequential extreme tops and bottom we expect that existing trend will continue until it changes.

I think the difficulty exists in defining when to enter a trend as they are being created in real time. How do you go about timing your entry in real time as these tops and bottoms are forming compared to just reading what price has done in the past and saying I should have bought there? Can you accurately define in real time where "there" is?

I know of several different ways people go about defining a trend but the key is to how and WHEN to get aboard the trend move without losing your butt in the process of positioning yourself correctly. The idea of trading retracements, 123 reversals, ect is old hat but I think a lot of traders know these ideas but fail in defining when to enter the market thus the use of fibs, momentum indicators, ect for timing. Whether true of not I have read somewhere that the majority of traders can pick the right direction of a market move but can't pick a low risk entry spot to get into the market. So then timing becomes the issue that separates those that make money or lose money while trading a trend move.

 

[oddiduro]

Quote from Julius:

This is all hypothetical. Or do you actually use this normal distribution model for your trading decisions? In that case we have nothing to discuss about, because I believe in an abnormal distribution for the reality of the stockmarket.

Yes, there is abnormal distribution in the market, but we have no idea when that overreaction will occur, or how badly the overreaction will be. It is not predictable, so would that not be random?

 

[oddiduro]

Quote from traderNik:

Random means unpatterned. If a series (of numbers, events) is random, there is no causal relationship between one element of the series and the next.

Now... At first I wrote

"If a series (of numbers, events) is random, we cannot predict the next element of the series, since all outcomes are equally likely"

However, I suppose there's nothing stopping you from predicting the next element. You can go ahead. The chance you have of being right is then related to the number of possible outcomes. For example, in Roulette, there are 38 numbers. The series which represents the consecutive results of the spinning of the roulette ball is random; however, there are only 38 possible outcomes (Roulette numbers go 0,00, and then 1-36, don't they?). So you have a fixed chance of being right when you guess at the result if any particular spin.

Now, if we consider the time series which is MSFT's closing price, what are the possible outcomes? Well, there is nothing to say that MSFT will not close at $4000 tomorrow morning. Intuition tells me that this is less likely than MSFT closing within +/- $4 of it's closing price today.

Doesn't that show in a crude way that the series which is the closing price of MSFT is not random?

Help - I am in way over my head here.

I think it would be random in the sense that it is not known where in the specified probable range price will be.

 

[oddiduro]

Quote from kjkent1:

Someone asked for a definition of random -- so I gave my definition.

All of a sudden, everyone is asking how to defeat the randomness of the market, or stating that they don't find market outcomes to normally distributed.

I propose that you actually undertake to analyze and play the game that I set forth earlier in this thread. It is not at all hypothetical, and if you can't win the game, then you can't win in the market.

Is everyone equally motivated to sell their shares? I think that would be a factor in how the game is to be played.

 

[oddiduro]

Quote from Magna:

For those with any doubt, Charlie Dow is ProfLogic. One and the same person. Flawlessly.

ProfLogic...

It is not necessary to hide behind a moniker to contribute to the discussion. As a student of yours, I have found that there is no way to anticipate whether or not we have a trend until leg 3 is completed. Just as there is no way to draw one of Jack's channels until we have point 3.

The assertion is that there is no way to determine where point three is going to be, and that makes the market random with regards to trends.

Again, I believe that most traders here can trade within the budding trend if they collect and analyze the data.

If you want this in Elliot terms, most traders must wait until wave 3 or 5 to enter a trade, because a trend cannot be seen before then.

This is strictly my opinion, and should be treated with the according grain of salt.

 

[FanOfFridays]

Quote from oddiduro:

Yes, there is abnormal distribution in the market, but we have no idea when that overreaction will occur, or how badly the overreaction will be. It is not predictable, so would that not be random?

I don't think so. I think that there is a range of probabilities which represents possible future worlds. Each future world can be described in (varying) probabilistic terms.

In a truly random system, there is no variance between the probability that this or that event will occur - all the possible 'next events' in the series are equally probable.

 

[nitro]

Quote from nitro:

...each share's "Fair Value" is $.09...

$9 not .09 c

nitro

 

[oddiduro]

Quote from traderNik:

I don't think so. I think that there is a range of probabilities which represents possible future worlds. Each future world can be described in (varying) probabilistic terms.

In a truly random system, there is no variance between the probability that this or that event will occur - all the possible 'next events' in the series are equally probable.

So Niederhoffer and Taleb have the best way to trade then?

And if so then we must simply learn to live with black swans?

 

[FanOfFridays]

Quote from oddiduro:

So Niederhoffer and Taleb have the best way to trade then?

Ummm... if I'm not mistaken, Vic and Nik took opposite sides of each other's trades, didn't they? Wasn't Vic famous for selling deep OTM options and Nik famous for buying them, anticipating the black swan?

Sorry oddi, I'm not sure exactly what you mean by this, but it wouldn't be the first time I missed the obvious. What do you mean by 'the best way to trade'?

Whoops - you must have added that bit about black swans as an edit. Yes!! I believe we have to learn to live with the black swans, and if we are exercising proper risk management, we have a good chance.

Also, I think that guys who are managing big amounts of money are probably making sure that they aren't massively correlated, so that a black swan may not be as devastating.

Hopefully they all learned their lesson from LTCM.

 

[oddiduro]

Quote from traderNik:

Ummm... if I'm not mistaken, Vic and Nik took opposite sides of each other's trades, didn't they? Wasn't Vic famous for selling deep OTM options and Nik famous for buying them, anticipating the black swan?

Sorry oddi, I'm not sure exactly what you mean by this, but it wouldn't be the first time I missed the obvious. What do you mean by 'the best way to trade'?

Whoops - you must have added that bit about black swans as an edit. Yes!! I believe we have to learn to live with the black swans, and if we are exercising proper risk management, we have a good chance.

Also, I think that guys who are managing big amounts of money are probably making sure that they aren't massively correlated, so that a black swan may not be as devastating.

Hopefully they all learned their lesson from LTCM.

That's what I meant, they both have the same models, taking opposite sides of that model.

LTCM, funny you should mention that. I think I saw on NOVA one year that LTCM knew that something was horribly amiss, in time enough for most funds to react, and had they not been the oil tanker trying to miss the iceberg, they may have survived.

In fact most funds did react, leaving LTCM no place to run and nowhere to hide.