Predicting randomness

oddiduro · Nov 4, 2005

Quote from traderNik:

You seem to come to the edge but for some reason you're unwilling to jump. As a trader, you're intuition is probably saving you. This is not a flame, as I am sure you are wondering about these things and are just trying to figure it out. But you have to look into the distance at where this particular path leads and admit that in the end, if you follow it, you have to confront the following question -

Are markets a random walk?

Anyone who believes in the random walk is either a disgruntled trader or an academic, a theorist.

What is interesting is that you made no mention of the kind of time frames you are talking about. Are you talking about the likelihood that we can predict the market's direction for the next 1 minute? 10 minutes? 2 hours? 2 days? 2 weeks? 2 years? It seems to me that some time frames are more 'predictable' than others. Didn't Linda Bradford Raschke says that she doesn't think longer time frames are predictable, and that she can only trade intra-day moves? Guaranteed there is someone else who makes a living on the premise that only the opposite is true.

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.

oddiduro · Nov 4, 2005

Quote from Enfinity:

What creates predictability in an environment like the market is the fact that people use systems to predict market direction. In other words, we are all making assumptions and many of our assumptions are similar creating the support and resistance at various levels.

Hope that clarifies the subject a bit for you.

That does not guarantee that x condition will necessarily create y results.

Fooled by Randomness??

oddiduro · Nov 4, 2005

Quote from libertad:

Every price movement has a reason...and a place to go..

And is definitely not random...To suggest that price movement has no reason...can only come from a fool...

Price has a reason...supply and demand.

But can the engine that determines supply and demand be determined beyond a coin flip?

No.

Cuspis · Nov 4, 2005

It is all about probabilities, not predictability.

duard · Nov 4, 2005

Quote from oddiduro:

If you flip a coin and get three heads on Mon, Tuesday, and Wednesday at noon precisely, does that mean it will happen on Thursday and Friday.

You sir, may have been fooled by randomness

I only hope you believe what you write.

Good luck and think it over.

autocorr · Nov 4, 2005

The question about trends ist if the markets have any kind of positive autoregression. The question about every kind of technical analyses is if there is any kind of autotocorrelatation positive or negative . The first poster is right ,you can not find positive autocorrelation since mid of 60s at least in the Dow.

I made a lot of these analyses but "trends" are really phantasy. They only exist in your eyes watching a chart

dont · Nov 4, 2005

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.

Could not agree more, also you need to look at all the possible paths. What I mean is just because you made money on a trade does not mean that you did the right thing. By the same token because you lost money doesn't mean you did the wrong thing.

The hard thing is accepting the randomness and moving on.

Also knowing when you made money from luck and also knowing when you lost it from luck.

And while I am on a role knowing when you made money from skill and lost money even if you had skill.

Bottom line is markets are random, they move for no reason, the sooner one, frees ones mind from; but why did it move like that, the better.

FanOfFridays · Nov 4, 2005

Quote from dont:
Bottom line is markets are random, they move for no reason

markets move for no reason??

geez, I thought they moved for a reason. I thought it had something to do with supply and demand.

Quote from oddiduro:

Price has a reason...supply and demand.

But can the engine that determines supply and demand be determined beyond a coin flip?

No.

No? why not? If a new kind of cotton pest wipes out the entire US cotton crop in a "once in a thousand lifetimes" type of event, and then the same pest is mistakenly introduced in the 3 other biggest cotton growing areas of the world and wipes out all the crops and somehow wipes out all the seedstock (it's a hypothetical), can we not predict (determine in advance) that this will have an effect on cotton prices?

If a small software company develops a product that the whole world will need, can't some intelligent investors have the foresight to see the potential and invest early? M$?

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.

oddi, we agree about the second half of your statement. Managing risk is what sets successful traders apart. However, a lot of people say that successful trading is about having an edge. I assume you believe that the only edge a trader can have is in the way he manages risk? That is, if he has exceptional risk management, then he will win even if his entries are randomized?

Quote from Cuspis:

It is all about probabilities, not predictability.

Agreed. And that doesn't mean that markets are a random walk.

Walther · Nov 4, 2005

Quote from oddiduro:

1/
Seriously, my trading experience has shown me that trying to predict the direction is worse than flipping a coin and using good stops with risk management.

2/
Any pattern that can be shown to have worked in hindsight can also be shown to have NOT worked in hindsight, which means that the patterns we think we see have no predictive potential at all.

Regards
Oddi

1/Predicting direction accurately is possible especially on short time frames.

2/ Just looking at the pattern exclusively is not the right thing to do.

oddiduro · Nov 4, 2005

Quote from traderNik:

markets move for no reason??

geez, I thought they moved for a reason. I thought it had something to do with supply and demand.

No? why not? If a new kind of cotton pest wipes out the entire US cotton crop in a "once in a thousand lifetimes" type of event, and then the same pest is mistakenly introduced in the 3 other biggest cotton growing areas of the world and wipes out all the crops and somehow wipes out all the seedstock (it's a hypothetical), can we not predict (determine in advance) that this will have an effect on cotton prices?

If a small software company develops a product that the whole world will need, can't some intelligent investors have the foresight to see the potential and invest early? M$?

oddi, we agree about the second half of your statement. Managing risk is what sets successful traders apart. However, a lot of people say that successful trading is about having an edge. I assume you believe that the only edge a trader can have is in the way he manages risk? That is, if he has exceptional risk management, then he will win even if his entries are randomized?

Agreed. And that doesn't mean that markets are a random walk.

Is there a rational basis to supply and demand? The market moved about 170 points the other day because of a name. That is not rational.

Attempting to predict the future is not rational. If there is no rational basis to an action, then that action is randomized.

The markets, if anything, measure the irrational behavior of an aggregate of individuals.