Stock movement, standard deviation and psychology

Quote from jbtrader23:

I don't believe stock movement is as "random" as the EMH and random walk theorists would have you believe. Stocks, and any market for that matter still behave according to the laws of supply and demand
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... and to the extent that those "supply and demand" forces are random, so are the prices. There's a caveat though. Random is in the ex ante, not ex post sense. Ex post you'll look at the signed volume and say, ain't no way this is random, look at those consistent buying/selling pressures etc. Predicting those ex ante is a different thing. Don't underestimate the power of random walk. I was just having fun half a year or so ago and wrote this program. If I remember the details correctly, I generated 100,000 random walks with a length of 200 time periods. Then I sorted them based on the cumulative 1-100th period return and looked at the subsequent preformance of the top winner decile and the bottom loser decile over the subsequent 100 periods. Guess what? I found that those portfolioes reversed - the winners (losers) had a statistically significant negative (positive) return. Just smth to ponder over for the weekend :D.
 
" I don't believe stock movement is as "random" as the EMH and random walk theorists would have you believe. Stocks, and any market for that matter still behave according to the laws of supply and demand "

How many traders follow the 20 ema in 2 minute charts and act based on whether prices are above or below it? A feedback system. Self fulfilling to an extent..

How many people jump on a trend as it starts? A lot..

Why does a trend on DAX futures follow the 9 ema in 1 minute charts? Because people use 9/18 emas in 1 minute charts as a guide..

We have positive feedback loops in all markets.. some are strong and some are not. The strong ones are easy to trade.. follow the trend. The weak ones are worth contratrading..

Remember traders (as opposed to investors) affect the way markets move.. feedback loops work until they produce an extreme event (a spike) and then everyone deserts them..
 
Quote from jwlabno:



There is nothing psychological or remarkable about it. If you calculated SD for some initial period, say 100 days and for the next 100 days referred the prices to it, you'd find much more irregularities, that is instances where price is outside 1SD.

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This is an interesting thread to be sure, wondered the same thing myself many times.

I disagree with the above statement somewhat though. The bell shaped curve is something that was just observed by a mathematician, a woman as I recall. There were so many things in nature that conformed to that shape that she gave it a name. I think that there is some significance to it and psychology if we can pick a moving average and then note deviations above/below are somewhat repeatable. People are looking at the price when it is too high relative to recent prices and saying "man that thing has run up too much, I'll wait and see before getting in for more of it", no? I think that is what the bollinger concept represents. It answers the kind of a vague and childish seeming question "how high is high?".

If you want to be nitpicky you can prove that stock prices aren't normal, they have fat tails but if you want to marry psychology and stock prices then I feel that the normal curve does a good enough job.

Is there a "fat tailed" indicator??? Perhaps somebody can link to one or tell us how to calculate it, might be more useful.

Max
 
Quote from maxpi:



If you want to be nitpicky you can prove that stock prices aren't normal, they have fat tails but if you want to marry psychology and stock prices then I feel that the normal curve does a good enough job.

Is there a "fat tailed" indicator??? Perhaps somebody can link to one or tell us how to calculate it, might be more useful.

Max
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1) Stock price distribution can't be normal b/c it's truncated at zero.
2) If you looked at stock returns instead, a lognormal will fit better - returns are positively skewed b/c of limited liability. Most you lose is 100%, the sky is the limit on the upside.
3) Kurtosis is a measure of how fat the tails are.
Cheers,
V.
 
Re:

Gold at $887 and the crash of '87.

Something that I've learned through the years that has been very profitable for me is to detach myself from reading the mainstream financial press, watching CNBC, etc. If I was always watching Lou Dobbs, Ron Insana, Bill Griffith, Neil Cavuto, reading CBS marketwatch, etc. then it would be that much more difficult to form a contrarian opinion and go the other way. If you're being inundated with the talking heads and the crowd, no one wonder it's so difficult to be objective and think rationally about the situation. By not getting caught up in the situation, I believe you're already 95% of the way there. The other 5% is to develop a tested and proved strategy and implement it. BTW, I haven't watched CNBC, Lou Dobbs or any of those those shows for probably 6 months. I don't miss it at all!

I believe there's a book out, Iceberg risk, that discusses why fat tails exist in the market. I think the reason goes back to market pyschology. The crowd gets too carried away in one direction or the other (i.e. Crash of '87).
 
1) Stock price distribution can't be normal b/c it's truncated at zero.
2) If you looked at stock returns instead, a lognormal will fit better - returns are positively skewed b/c of limited liability. Most you lose is 100%, the sky is the limit on the upside.
3) Kurtosis is a measure of how fat the tails are.
Cheers,


I think returns are positively skewed because of the natural tendency for the economy to rise over time. The economy rises, company profits rise. Profits rise and thus share prices rise as a result of that over the long haul (quite simplistic I admit).
 
Quote from jbtrader23:



I think returns are positively skewed because of the natural tendency for the economy to rise over time. The economy rises, company profits rise. Profits rise and thus share prices rise as a result of that over the long haul (quite simplistic I admit).
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Correct. Share price is an increasing function of time b/c not all the earnings are paid out as dividends. Retained $ increases equity. But this effect is minor compared to the limited libility issue.
 
Fat tails exist also in metereology or the Nil levels : are they due to psychology ?

BTW this is a copy of a private email:

"Let imagine that there is a fire in a cinema, people rushed out by fear, you observe the scene from the street: would you say that it is fear that cause them to get out ? Of course it is fear, but it is not the PRIMARY CAUSE, the primary cause is the FIRE but it could be anything else, you only know what it is by enquiring not just by observing people's fear. Moreover who is the author of the fire ? That is also a good question that Sherlock Homes would seek to answer.

I didn't say that psychology of crowd doesn't matter, I say that it is not the PRIMARY cause behind price. As I said my model somehow modelise the RATIONAL behavior of the BIG money, do you think that they act as such if they don't want to conduct people to buy or sell ? They can use engineering tools as my equations but how do you think that PHYSICALLY they can oblige REALITY to conform to the THEORICAL EQUATIONS if not by using REAL MONEY (through the process of market making or "intervention" of central bank or more obscure process whatever it is like the so-called plunge protection team etc.)"

Quote from jbtrader23:

Re:



I believe there's a book out, Iceberg risk, that discusses why fat tails exist in the market. I think the reason goes back to market pyschology. The crowd gets too carried away in one direction or the other (i.e. Crash of '87).
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I'm never offended when someone is not evil minded and that is not your case. In fact I was not answering to you but to Dbphoenix alias General Gurus-Killer-but-Authorative-Non-Guru-Fainter :D

Quote from rodden:



Glad you're not offended, HT.

Looking forward to your dissertation on BB's; they seem to be one of the better indicators - especially when coupled with RSI.

Incidentally, I'm not completely deluded; I'm aware that I've been talking through my hat through this entire thread. I just like to argue.
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And don't think that I am extremist because there are some that are more than me :D

PATTERNS -- So These REALLY Work???
http://www.elitetrader.com/vb/showthread.php?s=&threadid=15153&perpage=6&pagenumber=30

http://www.lewrockwell.com/blumert/blumert81.html

"Beware the Chartist: He Brings You False Science"



Quote from harrytrader:

Fat tails exist also in metereology or the Nil levels : are they due to psychology ?

BTW this is a copy of a private email:

"Let imagine that there is a fire in a cinema, people rushed out by fear, you observe the scene from the street: would you say that it is fear that cause them to get out ? Of course it is fear, but it is not the PRIMARY CAUSE, the primary cause is the FIRE but it could be anything else, you only know what it is by enquiring not just by observing people's fear. Moreover who is the author of the fire ? That is also a good question that Sherlock Homes would seek to answer.

I didn't say that psychology of crowd doesn't matter, I say that it is not the PRIMARY cause behind price. As I said my model somehow modelise the RATIONAL behavior of the BIG money, do you think that they act as such if they don't want to conduct people to buy or sell ? They can use engineering tools as my equations but how do you think that PHYSICALLY they can oblige REALITY to conform to the THEORICAL EQUATIONS if not by using REAL MONEY (through the process of market making or "intervention" of central bank or more obscure process whatever it is like the so-called plunge protection team etc.)"
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