Predicting randomness

[oddiduro]

Quote from Charlie Dow:

I gave up arguing about this a years ago once I had figured this all out. I'll do the best to explain myself and will not respond to questions or get into discussions about this. I will give you all the facts and you figure it out. Traders are stubborn, hardheaded and impatient by nature so some will think I'm nuts because they are too lazy to spend any time looking into what I'm saying and some will sit back and ponder the possibilities.

All tradable Market's price action is random in it's movement. That is a definable FACT! No one can predict price action with any long term consistency because of the randomness that DOES exist. Up to this point Odd and I agree.

The Random Walk Theory is dying though because we have the technology to see and gauge the consistency in that randomness that we could not see even 10 years ago. You are now saying, " How can the Markets be random AND consistent. Isn't that a contradiction?" No, and I will explain.

Living creatures like humans are a good place to start. No two people are alike, even identical twins. Each of us are unique and random in our creation but there are flawlessly accurate consistencies that we can create a data set to track. Snowflakes are another example. No two snowflakes are alike but yet there are flawless consistencies; they are all crystalline in their creation, they all have dimensional structure and they all exist only at temperatures below freezing. Now lets look at price.

Price is totally random in its movement but let's look at it's flawless consistencies.

1 - Price continuously oscillates creating tops & bottoms. (waves)
2 - Once price creates a top it will oscillate to create a bottom.
3 - Those price tops and bottoms occur sequentially, one chart at a time.
4 - Those price tops and bottoms occur at both extreme levels (High Tide/Low Tide) and levels that aren't extreme (waves). [Tracking those levels create definable, readable and tradable trends]

These are just a few example of price's consistencies. Now set up a controlled environment where those and other flawless consistencies can be read as price moves in real-time and you will see price's flawless flow. You see I said read and not predict. I state it this way because one can't predict price movement but can read it's movement within fixed environments (chart increments). I will add that one can not use minute charts or tick charts to read price action accurately because those chart increments are not accurate assessments of true price action. Minute and tick charts are variable charts and one can't use a variable chart to read flawlessly varying price increments (flawlessly random).

{Do not be misled - Elliott is wrong in thinking that there is flawless consistency in the number of waves in overall Market price action.}

Inside this controlled environment, TRENDS EXIST and ARE READABLE! This controlled environment is not a manipulated environment because all one is doing is eliminating the variable in all situations from the trading environment EXCEPT the pure randomness of price.

Odd's opinion of the Market's movement is accurate for his environment so his is absolutely correct in HIS assessment of price movement. He is unaware that anything else exists so to him it doesn't exist.

This is why I don't argue with people any more regarding trend. Trends exits if you know how to set up the environment, where to look and how to read it but if you don't know this you will still see snowflakes as flawless unique entities with absolutely no consistencies.

The Hubble telescope has overturned theories we held as irrefutable for decades. Computers and intense charting technologies has done the same thing for evaluating price action.

FINALLY, I drew the post I was looking for out this band of merry traders. A synopsis of consistency out of chaos.

EDIT: After reading this again, I need to ask, do trends exist BEFORE they occur?

How do we know it is a trend until AFTER it occurs?

Great post Charlie Dow.

 

[rols]

Strangely enough I was reading about this today. There was TV program about some students fro MIT who made millions from developing a card counting system.
http://www.bbc.co.uk/sn/tvradio/programmes/horizon/million_prog_summary.shtml

What is card counting?
Card counting has nothing to do with remembering every card that has been played, that's more a feat of memory. Although the card counting systems take many forms, one of the most popular and simplest is the high-low count. Each card is assigned a positive, negative or neutral value:
• 2, 3, 4, 5, 6 = +1
• 7, 8, 9 = 0
• 10, J, Q, K, A = -1
The player keeps a running total of the count, adding or subtracting as each card is played. The player raises their bet according to the positive strength of the count. The count also determines how to play each hand. For example, if the deck is strongly positive the player is more likely to draw face cards, so may profit by playing a more cautious strategy.

 

[oddiduro]

Quote from NUTSNEAL:

Making Money

If the market were random it would be possible to make money with proper risk management and trade sizing.

In a non random market with this same risk management the sky is the limit.

It really comes down to TRUTH (reality) as UNIVERSAL truth more and more approaches ULTIMATE truth.

Although in this situation your opinion or perception nor my opinion or perception of TRUTH has any influence on ULTIMATE TRUTH. It is what it is. However, if your believe and approach the market as though it were random, whether it ultimately is or is not, for you I suspect it may as well be.

As I mentioned earlier (I was being serious), when I get time I will write a book with my market formula(s) which show logically and prove mathematically the market is not random.

Many people equate an outlier as being a black swan. But as I recall a black swan is used in proving all swans are not white.

I have discovered a black swan as it relates to market randomness and RANDOM I assure you it is not. Although, I will admit to most it would appear so.

This doesn't mean many random walk believers may not be able to make money in or from the market.

What it does mean is that many non random walk believers will be and are able to make consistently HUGE amounts of money in or from the market.

I certainly don't mean to flame you. I wish you well with your research (keep an open mind and keep looking for that black swan) and also luck and success in your trading.

I would never considered a critical argument a flame. This another good post.

 

[dont]

Quote from traderNik:



Wha are the odds that any 'randomly dealt' two card combination will be two face cards if you know that after 40 cards have been dealt, there are only face cards left in the deck?

It's amazing how many people here think that something as predictable as human behavior could be random.

Obviously 1. Not sure why the probabilities in a coin toss reset? They are always 1/2 surely (ignoring the coin landing on its edge of course).

I belive you may be able to predict a single humans behavior, but I am doubtful of being able to predict the interaction of a large number of human/agents trading

 

[oddiduro]

Quote from dont:

Obviously 1. Not sure why the probabilities in a coin toss reset? They are always 1/2 surely (ignoring the coin landing on its edge of course).

I belive you may be able to predict a single humans behavior, but I am doubtful of being able to predict the interaction of a large number of human/agents trading

Black Swans come along(Hitler in Germany) that modify a group of humans behavior.

The larger the crowd, the lower the IQ, the greater probability of irrational and/or random events.

If human behavior were predictable we would definitely have our utopia by now, and no trade imbalances anywhere, but we do not.

 

[FanOfFridays]

Quote from dont:

Obviously 1. Not sure why the probabilities in a coin toss reset? They are always 1/2 surely (ignoring the coin landing on its edge of course).

I belive you may be able to predict a single humans behavior, but I am doubtful of being able to predict the interaction of a large number of human/agents trading

Please let me say that I am no statistician and no probability theorist. I am just going with what my gut tells me and trying to describe it.

I meant that when you toss a coin, the odds that it will come up heads are 1/2. Then if you toss it again, the odds are again 1/2.

This is not the case for dealing cards out of a depleted deck. If you get dealt a card from a whole deck, the odds that you will get a face card is 12/52. If you randomly take 40 cards out of the deck but you have the opportunity to know which 40 cards come out, you can then calculate the odds that if you are dealt a card out of the remaining twelve, it will be a face card. If all of the face cards have improbably remained in the deck, we know the odds that any randomly dealt card will be a face card. If we did not know anything about the composition of the deck, then we could not say that a randomly dealt card will infallibly be a face card.

Do the markets ever become 'stacked' in the same way as a deck of cards?

 

[nicholaf]

Quote from oddiduro:

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.

you just contradicted the theory of random walk - it assumes that market agents are rational. since we know that is not the case, the argument for random walk falls apart.

 

[Equalizer]

Quote from Charlie Dow:


Edit: ... most of this massive bog-standard-Dow theory rant deleted...

Price is totally random in its movement but let's look at it's flawless consistencies.

1 - Price continuously oscillates creating tops & bottoms. (waves)
2 - Once price creates a top it will oscillate to create a bottom.
3 - Those price tops and bottoms occur sequentially, one chart at a time.
4 - Those price tops and bottoms occur at both extreme levels (High Tide/Low Tide) and levels that aren't extreme (waves). [Tracking those levels create definable, readable and tradable trends]

These are just a few example of price's consistencies. Now set up a controlled environment where those and other flawless consistencies can be read as price moves in real-time and you will see price's flawless flow. You see I said read and not predict.

...blah blah bling blah...

Hmm...
Mr Dow, did you ever meet Mr Proflogic? That is almost Carbon Copy proflogic - with perfect now having been replaced by flawless in the text.

Nice bit of NLP.

Perfect Randomness perhaps?

 

[jaronimo]

Quote from rols:

Strangely enough I was reading about this today. There was TV program about some students fro MIT who made millions from developing a card counting system.
http://www.bbc.co.uk/sn/tvradio/programmes/horizon/million_prog_summary.shtml

What is card counting?
Card counting has nothing to do with remembering every card that has been played, that's more a feat of memory. Although the card counting systems take many forms, one of the most popular and simplest is the high-low count. Each card is assigned a positive, negative or neutral value:
• 2, 3, 4, 5, 6 = +1
• 7, 8, 9 = 0
• 10, J, Q, K, A = -1
The player keeps a running total of the count, adding or subtracting as each card is played. The player raises their bet according to the positive strength of the count. The count also determines how to play each hand. For example, if the deck is strongly positive the player is more likely to draw face cards, so may profit by playing a more cautious strategy.

Go to amazon and get "Bringing down the house". Its the story of MIT students taking on the casinos. It really relates to trading, plus its an interesting read.

 

[Pekelo]

Quote from oddiduro:

I have concluded that there is no such thing as a trend.
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.

Any pattern that can be shown to have worked in hindsight can also be shown to have NOT worked in hindsight,
Regards
Oddi

If you really think there is no such a thing as trend and you don't have a trendless (randomwalk) strategy you might as well close the shop and stop trading. But of course markets trend and they are not random.

Just because YOU have been unable to predict the market, that doesn't mean others have the same experience. Even if only 10% of traders are successful at predicting the markets, that doesn't mean that the markets are random, rather than prediction is a hard business...

What if we pick a pattern that has let's say a 71% success ratio?? With good money management, you should be able to make money 7 times out of 10 using that particular pattern...

What if we pick a guy who can predict the markets about 80% of the time? Would you call him just lucky, or would you agree that for some people it is possible to predict the markets?

Markets, trends and certain moves are predictable, but not for everybody and not all the time. I think most people (like you too) make the mistake of expecting predictability ALL the time. Some patterns and indicators work only under certain circumstances, maybe on rare occasions, nevertheless they work, even if they are quiet most of the time...

I have a longer term indicator, it only kicks in 8-12 times a year, but its success rate is over 80%...