Random Walk Theory Proved, once and for all.
- Thread starter mu200411
- Start date
9/11 is a good example.
We must ask ourselves;
1."Was 9/11 related to past price action?"
2."Did Bin Laden plan the attack according to pass price action?"
If not, the violent price action after 9/11 had nothing to do with the past price action. Some significant development or events happened randomly to affect the Market price action.
QED.
BTW you could make profit if you knew that 9/11 would make the Market random price action bias downward.
Mu.
We must ask ourselves;
1."Was 9/11 related to past price action?"
2."Did Bin Laden plan the attack according to pass price action?"
If not, the violent price action after 9/11 had nothing to do with the past price action. Some significant development or events happened randomly to affect the Market price action.
QED.
BTW you could make profit if you knew that 9/11 would make the Market random price action bias downward.
Mu.
Pass the pipe. I remove any endorsements I may have mentioned earlier. What started out as a seemingly decent thread for debate has turned into one of the infamous ET appeal to lewis carroll's "alice in wonderland" argument based scientific threads.
QED
Piezoe, toss me some of that tea, would you?
Sorry for going out of scientific way in response to non-scientific comments.
Let's go back to formula.
Randomness is inherent in the measurement system.
Random closing prices are produced by measuring closing prices at a regular interval.
Suppose a Market is govern by the formula;
daily price change = sin(360*sin(degree*pi()/180))+0.5
If a day is equal to 360 degrees of the specific Market you will get a straight line. See chart with the straight line.
If your day is equal to 107 degrees of the mentioned Market you will get a somewhat random looking chart. See chart with random line.
So even if the Market is predictable, but your measuring interval is not in harmony with the Market you will get a random Market.
At least apparently.
This also explains why the Low and the High movements look less random than the Close. It is because you leave out the regular time interval.
Let's go back to formula.
Randomness is inherent in the measurement system.
Random closing prices are produced by measuring closing prices at a regular interval.
Suppose a Market is govern by the formula;
daily price change = sin(360*sin(degree*pi()/180))+0.5
If a day is equal to 360 degrees of the specific Market you will get a straight line. See chart with the straight line.
If your day is equal to 107 degrees of the mentioned Market you will get a somewhat random looking chart. See chart with random line.
So even if the Market is predictable, but your measuring interval is not in harmony with the Market you will get a random Market.
At least apparently.
This also explains why the Low and the High movements look less random than the Close. It is because you leave out the regular time interval.
Slightly off topic but this is how I see it
Jerry Parker:
"Profitable trading, technical or fundamental, is dependent upon inefficient markets. Efficient markets prevent any type of system from extracting profits from the markets. Technical trading is successful because it rightfully assumes that some important fundamentals cannot be known until the profit opportunity has passed. Fundamental analysis that excluded the possibility of an Iraqi invasion of Kuwait in the summer of 1990 would have been incomplete and possibly unprofitable, or worse. This was the only "fundamental" that was worth knowing, yet was the very one that almost no one could have known. Technical analysis relies upon the idea that smart money will move into a market and give advance warning that a position should be taken.
Jerry Parker:
"Profitable trading, technical or fundamental, is dependent upon inefficient markets. Efficient markets prevent any type of system from extracting profits from the markets. Technical trading is successful because it rightfully assumes that some important fundamentals cannot be known until the profit opportunity has passed. Fundamental analysis that excluded the possibility of an Iraqi invasion of Kuwait in the summer of 1990 would have been incomplete and possibly unprofitable, or worse. This was the only "fundamental" that was worth knowing, yet was the very one that almost no one could have known. Technical analysis relies upon the idea that smart money will move into a market and give advance warning that a position should be taken.
The question of whether the market is random or not is very straight foward. Use a simple formula in excel ---->>> =randbetween(-1,1) and this will give you an output of -1, 0, or +1. This represents your tick. Add this tick to the previous price, which is how the stock market operates. In this case I began with a price of 1500 and generated roughly 2300 ticks. The results are in the following attachement. Tell me this <b>isn't</b> the stock market. There are patterns in there, support and resistance, trends, trend line breaks, false breakouts, etc.......it's all there from a random output and this is <b>identical</b> to the stock market.
If you believe technical analysis has any value you are fooling yourself. If you trade based on technical analysis and make money then congratulations for being able to trade randomness. The moment you accept the <b>fact</b> the market is random the sooner you will be on your way to generating consistent results from inconsistent movements.
If you believe technical analysis has any value you are fooling yourself. If you trade based on technical analysis and make money then congratulations for being able to trade randomness. The moment you accept the <b>fact</b> the market is random the sooner you will be on your way to generating consistent results from inconsistent movements.
The "smart money theory" is ludicrous. I find it amusing that people actually believe professional money managers actually know more than the average investor. Granted, there are some people who consistently outperform the market so there is some "smart" money out there but these guys are a needle in the hay stack. There is almost NO smart money out there. Guys like Buffett, Soros, Lampert, et al., do exist but they exist in a pool of Billions. There are billions of people out there trying to beat the market and a minor handful can do it consistently.
Definition of random: lacking any definite plan or order or purpose.
The market's move is clearly predictable. For example, earnings are better than expected, the stock price goes up; CPI is higher than expected, the market goes down; Fed cuts rate, the market goes up; terrorists attack wall street, market goes down. I can list 1,000 examples to show that the market is NOT random.
To say that the market is random is not only blind and stupid, but also misleading and deliberately argumentative. I will forgive you for being stupid (many posters on ET are stupid, face the fact), but for your argumentative and provocative behavior, I suggest that the oxygen of attention be deprived from the OP. If we ignore him, his argumentative behavior will not be rewarded and it will disappear.
The market's move is clearly predictable. For example, earnings are better than expected, the stock price goes up; CPI is higher than expected, the market goes down; Fed cuts rate, the market goes up; terrorists attack wall street, market goes down. I can list 1,000 examples to show that the market is NOT random.
To say that the market is random is not only blind and stupid, but also misleading and deliberately argumentative. I will forgive you for being stupid (many posters on ET are stupid, face the fact), but for your argumentative and provocative behavior, I suggest that the oxygen of attention be deprived from the OP. If we ignore him, his argumentative behavior will not be rewarded and it will disappear.
There's nothing like the random walk theory that brings out the fight in people. It's like a lion defending his pride. The hair on your back is probably standing up. Nothing wrong with that, however. It just means you defend your beliefs strongly.
To say that a terrorist attack proves the stock market is not random is absolute nonsense. You're referring to an event that probably won't happen for another 100 years and when it does the actual date it occurs will be based on randomness.
Have you ever seen the market rally on strong CPI news? Yes.
Have you ever seen a stock fall on good earnings? Yes
The Fed just cut rates. The market went down.
You can list 1000 events and I can show you a move opposite of what you would expect, except for the obvious case of a terrorist attack but that is certainly an extraordinary event.
The market can and does fall on good news and can and does rise on bad news. There is more to the market than pure randomness but randomness does account for a significant majority of the movements of price. Technical Analysis has merits as does Fundamental and Economic Analysis. All of this work IS worthwhile but when it comes down to it, if you don't at least open you're eyes to the fact that randomness explains the majority of the movement of the stock market then you'll never get ahead of the game.
Ask the top investors of our time if the market is random. Their answer will be, absolutely!
To say that a terrorist attack proves the stock market is not random is absolute nonsense. You're referring to an event that probably won't happen for another 100 years and when it does the actual date it occurs will be based on randomness.
Have you ever seen the market rally on strong CPI news? Yes.
Have you ever seen a stock fall on good earnings? Yes
The Fed just cut rates. The market went down.
You can list 1000 events and I can show you a move opposite of what you would expect, except for the obvious case of a terrorist attack but that is certainly an extraordinary event.
The market can and does fall on good news and can and does rise on bad news. There is more to the market than pure randomness but randomness does account for a significant majority of the movements of price. Technical Analysis has merits as does Fundamental and Economic Analysis. All of this work IS worthwhile but when it comes down to it, if you don't at least open you're eyes to the fact that randomness explains the majority of the movement of the stock market then you'll never get ahead of the game.
Ask the top investors of our time if the market is random. Their answer will be, absolutely!