Predicting randomness

[QQQShort]

Quote from uninvited_guest:

The chances of the DOW having 5 up days in a row are the same as flipping a coin and getting heads five times in a row.

1 in 32

For the sake of argument, let's assume this probability assessment is correct. Thus, the chance of the DOW moving higher is 50/50 each day.

Will the size of those moves be the same? If such is true, the DOW will be flat over the long-term.

Direction is only one factor ... magnitude must also be considered.

 

[uninvited_guest]

Quote from QQQShort:

For the sake of argument, let's assume this probability assessment is correct. Thus, the chance of the DOW moving higher is 50/50 each day.

Will the size of those moves be the same? If such is true, the DOW will be flat over the long-term.

Direction is only one factor ... magnitude must also be considered.

Taking in inflation the DOW does move flat over long-term.

 

[Thunderdog]

I think that much of this discussion is superfluous.

I believe that most people who take the market seriously, and earn their living by trading it, are fairly confident that the markets are not uniformly random. What anyone else thinks or believes is only so much cannon fodder.

I also believe that people who assume a normal distribution when assessing the so-called "probabilities" in respect of market outcomes have not yet encountered an important and painful learning experience. But if they continue with their ill-conceived assumption, I am confident that the lesson will be learned, and learned well, in due course.

Just my opinion, of course.

 

[OddTrader]

Quote from nononsense:

(2) Making money in markets could be taken as a definition of 'prediction' in our particular market discussion context. Anybody who knows how to predict, i.e. make money, will likely not wish to share his hard fought for knowledge. Giving it away would render his knowledge worthless;

My prediction is that, imo the above prediction about prediction for predictions should be correct.

 

[QQQShort]

Quote from uninvited_guest:

Taking in inflation the DOW does move flat over long-term.

I have not researched the DOW; I do know the S&P 500 has moved higher over the long-term on an inflation-adjusted basis.

 

[cnms2]

Quote from OddTrader:

My prediction is that, imo the above prediction about prediction for predictions should be correct.

I've just read Trading Time Frame, link provided by OddTrader in an older thread. Interesting article although some might find it a little difficult to follow. It basically talks about the price signal immersed in the informational noise, and a few ways to better extract it. I recommend this article.

The apparent randomness of the market is the result of the noise randomness. There is an objective factor we cannot avoid in this perception, but there is also a subjective factor that we can and should reduce.

If you're trading dailies an immediate lower time frame may have a limited use to pin point entries, but generally intraday time frames will be a confusing noise.

If you want to reduce the apparent randomness you have to correlate your input data time frame with your trading time frame.

Input noise happens in two dimensions: time and price. Time frame correlation filters out the time component of the noise. To further reduce the noise effect the price amplitude has to be smoothed out too.

 

[oddiduro]

An article about black swans.

http://www.fooledbyrandomness.com/blackswan.pdf

 

[MAESTRO]

Quote from Thunderdog:

I think that much of this discussion is superfluous.

I believe that most people who take the market seriously, and earn their living by trading it, are fairly confident that the markets are not uniformly random...

What a boy! My favorite dog Thunder! You always make me laugh. God bless you.
Cheers

 

[Pekelo]

Quote from oddiduro:

An article about black swans.

http://www.fooledbyrandomness.com/blackswan.pdf

By definition, a Black swan event has 3 properties:

- large impact
- surprize effect
- incomputable probability

Thus by definition, we can not predict a Black swan event. Nobody said here we could. Two notes on this:

1. Your original post was about the nonexistence and unpredictibility of trends and not black swan events.

2. If I remember well, Taleb kept buying OTM puts so in case of a black swan event he would be handsomely paid off for all the wasted money while the event has not occured. Because of the sideways nature of the current markets (and that was easily predictable, at least I did) he would have been better of by shorting indexes.

 

[oddiduro]

Quote from Pekelo:

By definition, a Black swan event has 3 properties:

- large impact
- surprize effect
- incomputable probability

Thus by definition, we can not predict a Black swan event. Nobody said here we could. Two notes on this:

1. Your original post was about the nonexistence and unpredictibility of trends and not black swan events.

2. If I remember well, Taleb kept buying OTM puts so in case of a black swan event he would be handsomely paid off for all the wasted money while the event has not occured. Because of the sideways nature of the current markets (and that was easily predictable, at least I did) he would have been better of by shorting indexes.

Yes, I know, but the discussion evolved in this direction, so I put up an informational article.

I think trends only exist after they have occured. Sure I may have a bias towards being long or short, but just because the market has gone up for 5 days does not mean that that it will go up a 6th day.

And there is no way to tell if it will.