Predicting randomness
- Thread starter oddiduro
- Start date
Just stepped over an earlier thread you started Hershey's Equity thread in August 2003. Are you sill using his method? Or maybe your experience with JH's method lead you to believe that markets are random ...Quote from oddiduro:
I have concluded that there is no such thing as a trend. All patterns happen in hindsight. Taleb has something with his market views.
I am not marketsurfer
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.
Let's talk yet again about whether we are not barking up the wrong tree with this prediction stuff.
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
No irony, no sarcasm, just curious.
This discussion, although interesting, seems to have devolved a bit, with each side just stating the same points over and over again.
In other words, the random walkers simply refuse to accept the multiple proofs that have been placed before them. They can't admit that it's about probabilities and that market action can be predicted within this framework. The funny thing is, the people who think the markets are random can still come up with disclaimers like the one above about the corn market, which is the only argument that most of us non-random- walkers are making. (Not saying that Perseus is a random walker - I don't know if he is or isn't).
Also, there hasn't been much discussion about predicting market movements using funnymentals. I am sure the random walkers will claim that Warren and other value investors are just lucky to have happened to pick the stocks that would go up over the years.
btw... I found it funny that Heisenberg has been cited by both sides as evidence that their position is correct.
Occasional anomalous events do not prove that ordered systems are disordered.
My point was sort of missed. It is this: markets don't drive themselves, they are largely event driven (the fundamentals), so we need to look at the underlying events that move them and people's responses to those events.
Yes, if we have a surprise july freeze corn will be bid up, but the key question is can you predict that freeze and is it 'random'? I say no and a qualified yes, it's just the weather after all and I did say surprise. What remains then is just how quickly can you jump into the markets since they are not 100% efficient- the first bidder gets the most cash, the last guy gets burned. This was an example of a random nonpredictable event but with a fairly predictable response.
On the other hand we can have fairly predictable events, like the holiday seasons, but with a far less predictable response to that event in the markets.
Are some other types of events predictable (statistically), and people's response to them predictable (statistically)? perhaps, but you better be quick.
The random walk model is very flawed. First it does not explain the 20 minute correlation existing in the stock market nor does it explain black swans. Also in order to use it correctly to explain the stock market's long term behavior you have to introduce a bias- an external ad hoc variable.
Heisenberg is irrelevent here, people should not even bring it up. The relevent physically analogy is nonlinear sytems as I think someone discussed above. Einstein was talking about heisenberg in the dice quote- irrelevent. Quantum uncertainty is not applicable.
The proof that nonlinear dynamical systems is the appropriate analogy is the link I gave earlier. Market prices obey power laws, in other words they are governed by scale free processes. What I mean by that is your 100 lot EMINI order may affect things very little or it is possible for it to trigger a huge response that was set up by some very delicate conditions. A bad earnings report may do very little to price or it may set off a huge response, this applies to any event.
The main feature of nonlinear dynamical systems is that the further in time you go out, the less predictable it gets (just like the weather). But in this case we have two coupled nonlinear systems that take input from a highly nonlinear world: the financial system, and the human response to events (irrational most of the time). The system itself (people+markets) is nonrandom but highly nonlinear (if you have enough information about it and nobody ever does), but the external events that drive it can add even more unpredictability making the whole thing quite hopeless in the exact sense. But this isn't saying that quick traders can't make a buck or that there can't exist good money management schemes.
Randomness is not really a useful concept since a true random number is very hard to generate and true randomness appears to only work at the quantum level. Nonlinearity is the key here, not randomness.
In other words, the random walkers simply refuse to accept the multiple proofs that have been placed before them. They can't admit that it's about probabilities and that market action can be predicted within this framework. The funny thing is, the people who think the markets are random can still come up with disclaimers like the one above about the corn market, which is the only argument that most of us non-random- walkers are making. (Not saying that Perseus is a random walker - I don't know if he is or isn't).
Also, there hasn't been much discussion about predicting market movements using funnymentals. I am sure the random walkers will claim that Warren and other value investors are just lucky to have happened to pick the stocks that would go up over the years.
btw... I found it funny that Heisenberg has been cited by both sides as evidence that their position is correct.
Occasional anomalous events do not prove that ordered systems are disordered.
My point was sort of missed. It is this: markets don't drive themselves, they are largely event driven (the fundamentals), so we need to look at the underlying events that move them and people's responses to those events.
Yes, if we have a surprise july freeze corn will be bid up, but the key question is can you predict that freeze and is it 'random'? I say no and a qualified yes, it's just the weather after all and I did say surprise. What remains then is just how quickly can you jump into the markets since they are not 100% efficient- the first bidder gets the most cash, the last guy gets burned. This was an example of a random nonpredictable event but with a fairly predictable response.
On the other hand we can have fairly predictable events, like the holiday seasons, but with a far less predictable response to that event in the markets.
Are some other types of events predictable (statistically), and people's response to them predictable (statistically)? perhaps, but you better be quick.
The random walk model is very flawed. First it does not explain the 20 minute correlation existing in the stock market nor does it explain black swans. Also in order to use it correctly to explain the stock market's long term behavior you have to introduce a bias- an external ad hoc variable.
Heisenberg is irrelevent here, people should not even bring it up. The relevent physically analogy is nonlinear sytems as I think someone discussed above. Einstein was talking about heisenberg in the dice quote- irrelevent. Quantum uncertainty is not applicable.
The proof that nonlinear dynamical systems is the appropriate analogy is the link I gave earlier. Market prices obey power laws, in other words they are governed by scale free processes. What I mean by that is your 100 lot EMINI order may affect things very little or it is possible for it to trigger a huge response that was set up by some very delicate conditions. A bad earnings report may do very little to price or it may set off a huge response, this applies to any event.
The main feature of nonlinear dynamical systems is that the further in time you go out, the less predictable it gets (just like the weather). But in this case we have two coupled nonlinear systems that take input from a highly nonlinear world: the financial system, and the human response to events (irrational most of the time). The system itself (people+markets) is nonrandom but highly nonlinear (if you have enough information about it and nobody ever does), but the external events that drive it can add even more unpredictability making the whole thing quite hopeless in the exact sense. But this isn't saying that quick traders can't make a buck or that there can't exist good money management schemes.
Randomness is not really a useful concept since a true random number is very hard to generate and true randomness appears to only work at the quantum level. Nonlinearity is the key here, not randomness.
Studying under Jack was very rewarding, his techniques help me view the market in an organized way. He taught how to use volume in analysis
I trading his method for awhile, then the bug bit me to try to develop my very own system, so I began to do that.
Jack does not believe that the markets are random. He believes that volume is a leading indicator to price, as it often is.
However, it often is not, and I have a quirk that the system that I ultimately wanted to use must work in all markets, and under any conditions.
Thanks for asking
Quote from hermit:
Where did I talk about randomness anywhere.I was pointing out the apparent ineptitude of Niederhoffers Article.
Fooled by Cognitive Dissonance
VN was simple stating that there is no correlation to the patterns that we say can predict direction, is that not in fact true?