Random Walk Theory Proved, once and for all.

[achilles28]

Quote from IluvVol:

There are no predictable market events. If this was true as you suggest then how come that market professionals at, for instance, options market making desks, rarely if ever trade delta?

Because prices are extremely hard to predict in the long term.

Long term defined as >12 hours unless fundamentals are a shoe-in.

Basic technicals work on all time frames but are less relevant as the period grows.

The reverse is also true.

Quote from IluvVol:

I gave this example because I think it relates to the theme of TA. Technical analysis seems to suggest that one can find positive expectation trades simply by looking at past prices (and TA is just that, the synthesis of past prices). I beg to differ!!!

Beg all you like. Thousands of TA traders would respectfully disagree.

 

[achilles28]

Quote from IluvVol:


I mean, if you claim it does could you give me any logical explanation why it should?

Beautiful.

Think about it.

Why is Hillary a shoe in for President?

 

[PointOne]

Hi
I don't know if this has already been discussed, but rather than compare randomly generated price action with the real thing have you considered examining the mirror image of a real OHLC chart and contemplating why it looks wrong?

 

[IluvVol]

Yes, but a thousand of TA traders also go broke each given day and a new thousand joins the game till they go broke as well. The ones who survive, I think, dont make it because their TA system works but because of their sound money and risk management.

On the contrary, I dont see many bank traders blow up and I think one reason, besides stringent risk management, is that they dont expose themselves excessively to unpredictable movements in the underlying.

Then you have the other crowd, buy side hedge fund and mutual fund traders. I think you get the typical survivorship bias here. The ones that drop out of the game are gone and forgotten or join another firm and start over and the public just hears about the stars who made it big. But I think this does not mean anything, after all when you start with 100 monkeys and 50 go short and 50 long and then the winning 50 again split into 25 long and 25 short and so on you will have in the end a monkey guru that the crowd listens to.

Quote from achilles28:

Beg all you like. Thousands of TA traders would respectfully disagree. [/B]

 

[IluvVol]

Not trying to pick on you. But your example does not make much sense as it heavily depends on your political opinion. I am not American nor a native speaker but I dont think your example helps in making a point in regards to our specific topic.

Quote from achilles28:

Beautiful.

Think about it.

Why is Hillary a shoe in for President?

 

[achilles28]

Quote from IluvVol:

Not trying to pick on you. But your example does not make much sense as it heavily depends on your political opinion. I am not American nor a native speaker but I dont think your example helps in making a point in regards to our specific topic.

Pick on me all you like. It doesn't bother me in the slightest.

The example was sound and chosen for a reason.

The parallels are the same.

 

[achilles28]

Quote from IluvVol:

Yes, but a thousand of TA traders also go broke each given day and a new thousand joins the game till they go broke as well. The ones who survive, I think, dont make it because their TA system works but because of their sound money and risk management.

On the contrary, I dont see many bank traders blow up and I think one reason, besides stringent risk management, is that they dont expose themselves excessively to unpredictable movements in the underlying.

Then you have the other crowd, buy side hedge fund and mutual fund traders. I think you get the typical survivorship bias here. The ones that drop out of the game are gone and forgotten or join another firm and start over and the public just hears about the stars who made it big. But I think this does not mean anything, after all when you start with 100 monkeys and 50 go short and 50 long and then the winning 50 again split into 25 long and 25 short and so on you will have in the end a monkey guru that the crowd listens to.

With risk / trade management held constant, survivorship of bank versus TA traders would fall into a reasonable proximity.

That said, I've never thought much of the lottery ticket paradigm.

If a Monte Carlo was run on the track record of an immensely profitable trader - like a Livermore or Jim Rogers - I'd bet the odds of such success far exceed the weighted probability. I'd put money on it.

A winning trade is timing on the entry and exit. Odds of that happening, successively over the months and years - in large amounts - are incredibly small.

At least if left to chance

 

[MGJ]

D'ya know who would be really interested in a mathematical proof of this theorem? A math professor (professional theorem prover himself) who runs a hedge fund. Luckily such people really do exist. You could print up your proof on fancy high-brightness paper and send it to Jim Simons (profile of Jim: http://www.bloomberg.com/apps/news?pid=20601109&sid=aq33M3X795vQ&refer=exclusive ) founder of Renaissance Technologies, and explain to him what it means in terms of "outperforming the market over the long term". Since Jim proves theorems himself, I'm sure he'd be fascinated. Who knows, he might even offer you a job. I understand the salaries at Renaissance are stratospheric and the bonuses are unbelievable.

 

[IluvVol]

I am getting increasingly confused with your posts. Where do you try to get to with this last one?
Comments, see below...

Quote from achilles28:

With risk / trade management held constant, survivorship of bank versus TA traders would fall into a reasonable proximity.

--> so you suggest bad risk management is what makes the difference between retail TA traders and bank traders? (when I talk about TA traders I talk about people who take this from the retail side). THis would also suggest that it would not make any difference what approach you take to trading, whether it be technical, fundamental, or any other type of analysis and that as long as one is a good risk manager he/she can compete on an equal footing with all the other top traders. So why then do you and I not make the same 200 million a year as some hedge fund top guys? Dont see your point here... (and believe me I exercise very sound risk and money management techniques)

That said, I've never thought much of the lottery ticket paradigm.

--> meaning? my monkey example has nothing to do with any lottery ticket paradigm, not even remotely in terms of conceptuality.

If a Monte Carlo was run on the track record of an immensely profitable trader - like a Livermore or Jim Rogers - I'd bet the odds of such success far exceed the weighted probability. I'd put money on it.

--> not sure what you mean with running a monte carlo simulation on someone's track record. What do you simulate, and what is your goal of the simulation?

A winning trade is timing on the entry and exit. Odds of that happening, successively over the months and years - in large amounts - are incredibly small.

--> who claimed otherwise? All traders who made a bunch know how to win and also how to handle losing trades. So what?

At least if left to chance

 

[IluvVol]

yes but due to confidentiality one would never be able to share all the accumulated wisdom here at ET after having joined Renaissance. What a waste...;-)

Quote from MGJ:

D'ya know who would be really interested in a mathematical proof of this theorem? A math professor (professional theorem prover himself) who runs a hedge fund. Luckily such people really do exist. You could print up your proof on fancy high-brightness paper and send it to Jim Simons (profile of Jim: http://www.bloomberg.com/apps/news?pid=20601109&sid=aq33M3X795vQ&refer=exclusive ) founder of Renaissance Technologies, and explain to him what it means in terms of "outperforming the market over the long term". Since Jim proves theorems himself, I'm sure he'd be fascinated. Who knows, he might even offer you a job. I understand the salaries at Renaissance are stratospheric and the bonuses are unbelievable.