Predicting randomness

Quote from oddiduro:

LTCM used their models to try to predict the market and the black swan got them.

My assertion of market randomness is that markets cannot be predicted.
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I have just finished skimming Stephen Wolfram's book a New Science.

He would say that even if the markets are not random and follow some simple rule.
It is still not possible to predict them because, that would mean that you had a way to do the computation that the market does, faster.
That is, the market is doing a irreducible computation.
So whether its random or not is irrelevant.

Its not predictable!

I strongly think that this is a true statement, sure after the fact we can see structure but it always seems to be after the fact.
 
Quote from dont:



He would say that even if the markets are not random and follow some simple rule.
It is still not possible to predict them

So whether its random or not is irrelevant.

Its not predictable!
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Not predictable ever???

So you feel that in 10 years, if I tried every day to predict before the open whether the close would be higher than the open for that day, I wouldn't ever be right?

If you agree I might be right once or twice in those 10 years... then how many times do you think I would be right? 1% of the time? 5% of the time?

You seem to be saying that the market's aren't 100% predictable. I don't think anyone would argue with that. As a bunch of people on here have tried to explain, it's not about prediction, it's about probabilities. If you can be right even 50% of the time, it may be enough of an edge to trade successfully, depending on your win/loss ratio.

Anyway, I seem to be repeating myself so maybe I should quit. Thanks for starting an interesting discussion, oddi.
 
Wow you guys just love to make things complicated huh.

So, all I need to do to prove that the market is NOT random is to give ONE counter-example. If you don't like any of mine, I'm sure some more people can come up with some.

- Buy the rumor, sell the news.

- You are not going to convince me that Warren Buffett is a bell curve outlier and that he just picks random trades. Fundamental analysis works (over relatively long timeframes).

- Give me any stock. I can predict to you that the absolute value of the price move from the day before an earnings release to the day after an earnings release will be waaay higher than the average 2 day price move. That's not random.

- Just the fact that there are volatility spikes that are caused by news releases implies that price does not have the potential for the same distribution in various time periods, therefore it isn't random.

Can you not think of one single non-random price behavior in the market? If you can, then it is not random.

Just because you don't know how to quantify these relationships doesn't mean price movement is random.

So, the title of the thread is misleading. By its nature, randomness is not predictable other than the fact that it is unpredictable (there can never be "Absolute chaos", as the term "Absolute" implies an order of sorts). The question of the market being random is provably false. Maybe I didn't do a good job of it though (too much Merlot, sorry). :)

Are these non-random events tradeable? Well, that's a different question.
 
dont,

Has SW seriously studied the markets and made that statement about them?

If prediction is probabalistic and not absolute he might disagree with you. When I enter a trade I don't say "its going to do this" I say "its got a 60/70/80 % chance of giving me a profitable exit signal" and then I execute my strategy until I exit profitably or otherwise.

I am obviously predicting something but its about a series of opportunities not a single one.
 
No I don't belive he means perfectly, but near enough to be useful.

So for example Newtonian mechanics predicts the motions of the planets pretty well, but not 100% But for our purposes thats good enough.

Oddi put it well in another post, I am not saying you can't make money from the markets. I am also not saying that a certain times you can't predict with a certain amount of accuracy.

What I am saying is that you can't predict with precision.

For example predict the 1 000 000 million digit of Pi. You have a 1 in ten chance of guessing right. I am certain though that if you do your prediction a few million times you will find that you are only right 10% of the time. Now if you use a formula for calculating Pi well now you will predict it perfectly. That is with precision and accuracy
 
Quote from Agyar:

Wow you guys just love to make things complicated huh......
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Doesn't matter what you know, prove, or present. Lots of members of ET will gladly come around to convince you that what you are doing really doesn't work. :confused: :D :confused: But, it's a fun place and good ideas do occasionally surface. Just gotta keep the radar on.
 
Quote from danoXP:

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?
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Dano,

If I may intercede...
The DJIA has been around for nearly 100 years. And there were daily computed market averages as far back as 1885. What stocks were in the averages, was only important during that specific period that they were being used as an overall market barometer: because that is all they are. A barometer! A barometer, that is easily quotable, commonly understandable and provides a greater perception of market activity than trying to quote let's say every stock. So I agree with the poster. The trend has been up since 1896, when the realtive DJIA bottomed at 28 points... and is now 10,500.
 
Quote from kiwi_trader:

dont,

Has SW seriously studied the markets and made that statement about them?

If prediction is probabilistic and not absolute he might disagree with you. When I enter a trade I don't say "its going to do this" I say "its got a 60/70/80 % chance of giving me a profitable exit signal" and then I execute my strategy until I exit profitably or otherwise.

I am obviously predicting something but its about a series of opportunities not a single one.
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From the book, it appears he has not studied the markets. I am making that statement after having skimmed the book.

I agree with you about the way you trade I do the same.

Not sure that you are predicting, in the sense of this thread. To me prediction is, the price will be 100 at 13H00 tomorrow at 13H01 its 99.99. And you do this consistently. Saying the markets going up is worthless unless you specify by how much and over what time frame. Since you can't predict you are forced to use probabilities.
 
Agreed. Although I'm not certain that a probabalistic "prediction" isn't still a prediction and I often let lower timeframe action let me tell me when the market is running out of action rather than a predetermined exit point.
 
I do the same on smaller time scales.

In terms of S Wolfram the idea seems to be that if a system is following some simple rules it can generate very complex/random behavior.

His breakthrough is that physical systems compute.
Traditional science has only studied those systems that are reducible. that is you can approximate their behavior faster than they themselves do the computing, hence you can predict what they will do.

In a irreducible system trying to compute its behavior in the future will take just as long as waiting to see what it will produce, hence no prediction is possible in practice.

I am making the leap that the markets are an irreducible system.

Since we can't predict we are forced to trade probabilistically
 
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