Stocks are random variables
- Thread starter WallStGolfer31
- Start date
Whitster,
Even in the "hard" sciences like Physics ;
How long has science believed that Newtonian physics was
the ultimate truth ? about 200 years
Then Einstein showed up and turned the cartesian view of physics up-
side down.
Quantum physics caused another revolution.
All those theories are a very good approximation of reality on
each scale BUT a unified theory of all does not exist yet and
believe me, will NEVER exist but that's off topic
Sometimes those academics should come out of their ivory
tower
Even in the "hard" sciences like Physics ;
How long has science believed that Newtonian physics was
the ultimate truth ? about 200 years
Then Einstein showed up and turned the cartesian view of physics up-
side down.
Quantum physics caused another revolution.
All those theories are a very good approximation of reality on
each scale BUT a unified theory of all does not exist yet and
believe me, will NEVER exist but that's off topic
Sometimes those academics should come out of their ivory
tower
Remember the added value of 2 academics like Merton and Scholes
who won together the nobel prize in economics to the hedge
fund Long Term Capital management didn't prevent the
meltdown which almost caused a worldwide collapse of the
financial system.
http://www.erisk.com/Learning/CaseStudies/Long-TermCapitalManagemen.asp
but that's another story
who won together the nobel prize in economics to the hedge
fund Long Term Capital management didn't prevent the
meltdown which almost caused a worldwide collapse of the
financial system.
http://www.erisk.com/Learning/CaseStudies/Long-TermCapitalManagemen.asp
but that's another story
Quote from optioncoach:
If you take the time to research and analyze every aspect and perform the requisite amount of background checking needed to make a truly informed decision, then you will know what DD means..
P.S. DD = due diligence
:eek: ...........
Provocative posts like this make us all reexamine our basic, unconscious assumptions about how markets work, and that's valuable.
"You can't predict the future with patterns on a chart."
How could it be otherwise? Charts are crude, linear attempts to model nonlinear phenomena.
But how else to depict price movements?
luckily, as whitster points out, trading is about probability, not prediction.
A couple of obvious examples: if price probes a support or resistance area several times and fails, the odds are better than even that it'll reverse.
Or if price enters a narrow range, it'll eventually move sharply up or down.
You can prove this for yourself if you have the patience to test 50-100 examples.
"I've tossed a coin before and it has landed on heads 15 times in a row, what's your point?"
People who accept the Central Limit theorem and other fantasy will tell you to keep tossing! Eventually -- if you have the patience -- you're likely to achieve a (more or less) 50:50 distribution. (The more pedantic among them would also point out that coin tosses are independent events, so heads COULD come up another 15 times!).
But all this is beside the point: only a fool would trade 50:50 odds. As whitster (almost typed "shitster) notes, we use charts to look for a statistical edge.
"You can't predict future prices by doing research based financial statements from the past, it's already priced in!"
Amen to that. But don't tell craven equity analysts who get paid huge $$$ to make farcically inaccurate earnings forecasts that help to sell the "product."
Finally, wallstgolfer, there's a growing body of evidence that markets do have an underlying structure, a fractal one. That's why a commonsensical use of Elliott Wave "works" about 50% of the time. (The trick is to determine when it's "working"!).
Before you wander off chortling that "price action is random" (I don't think you mean "price is a random variable" , which actually implies that price action ISN'T random, see http://cnx.org/content/m13418/latest/), I highly recommend that you read the first three chapters of Robert Miner's Dynamic Trading. From a practical, trader's perspective, he shows convincingly -- at least for me -- that, at least some of the time, price moves in recognizable, tradeable patterns. Bill Williams offers similarly thought-provoking ideas in the first two chapters of New Trading Dimensions
They probably won't change your mind, but it should get a good workout.
FWIW: I earn my living trading Forex based on what I've learned from Miner, Williams, et al
Good trading to you all -- Bill Sims
"You can't predict the future with patterns on a chart."
How could it be otherwise? Charts are crude, linear attempts to model nonlinear phenomena.
But how else to depict price movements?
luckily, as whitster points out, trading is about probability, not prediction.
A couple of obvious examples: if price probes a support or resistance area several times and fails, the odds are better than even that it'll reverse.
Or if price enters a narrow range, it'll eventually move sharply up or down.
You can prove this for yourself if you have the patience to test 50-100 examples.
"I've tossed a coin before and it has landed on heads 15 times in a row, what's your point?"
People who accept the Central Limit theorem and other fantasy will tell you to keep tossing! Eventually -- if you have the patience -- you're likely to achieve a (more or less) 50:50 distribution. (The more pedantic among them would also point out that coin tosses are independent events, so heads COULD come up another 15 times!).
But all this is beside the point: only a fool would trade 50:50 odds. As whitster (almost typed "shitster) notes, we use charts to look for a statistical edge.
"You can't predict future prices by doing research based financial statements from the past, it's already priced in!"
Amen to that. But don't tell craven equity analysts who get paid huge $$$ to make farcically inaccurate earnings forecasts that help to sell the "product."
Finally, wallstgolfer, there's a growing body of evidence that markets do have an underlying structure, a fractal one. That's why a commonsensical use of Elliott Wave "works" about 50% of the time. (The trick is to determine when it's "working"!).
Before you wander off chortling that "price action is random" (I don't think you mean "price is a random variable" , which actually implies that price action ISN'T random, see http://cnx.org/content/m13418/latest/), I highly recommend that you read the first three chapters of Robert Miner's Dynamic Trading. From a practical, trader's perspective, he shows convincingly -- at least for me -- that, at least some of the time, price moves in recognizable, tradeable patterns. Bill Williams offers similarly thought-provoking ideas in the first two chapters of New Trading Dimensions
They probably won't change your mind, but it should get a good workout.
FWIW: I earn my living trading Forex based on what I've learned from Miner, Williams, et al
Good trading to you all -- Bill Sims
1.) The stock market has an upward bias due to the increase in money supply year after year to accommodate population growth.
2.) The stock market does trend over periods of time due to supply imbalances - more people are buying than selling etc.
3.) The stock market must exhibit randomness to stay alive. If everyone can predict market movements then the stock market would flat line. Actually the market isn't a living being but a reflection of everyone trying to beat the other to the punch.
So, stocks do trend but their movements are random within the trends.
This is why a flip of a coin/money management approach will not make money - trends kill it.
Also why prediction methodologies won't work (elliot etc.) - the market will change as people try to figure it out - creating randomness.
Enough to drive anyone crazy.
2.) The stock market does trend over periods of time due to supply imbalances - more people are buying than selling etc.
3.) The stock market must exhibit randomness to stay alive. If everyone can predict market movements then the stock market would flat line. Actually the market isn't a living being but a reflection of everyone trying to beat the other to the punch.
So, stocks do trend but their movements are random within the trends.
This is why a flip of a coin/money management approach will not make money - trends kill it.
Also why prediction methodologies won't work (elliot etc.) - the market will change as people try to figure it out - creating randomness.
Enough to drive anyone crazy.
your premises are basically correct, to some extent but your conclusion is not deductively valid
the market is, as you say, what other traders do.
the market, by its nature, will also make the most radical (and profitable) moves when it catches most people on the wrong side of the movement
again, that's not RANDOM
the point is - is the market SO efficient that no edge is available to the retail trader.
the answer is CLEARLY - no
and again, everybody is concentrating on charts. this says NOTHING about charting. you can gain an edge in the market without EVER looking at a chart.
all a chart is, is a visual model of past price behavior over time
if you can recognize value BEFORE most other people do, and buy when demand oustrips supply (or before it) and exit before supply outstrips demand, you will be profitable.
the idea that this is impossible is absurd
there is NO statistically possible way that i (and many other traders) could over THOUSANDS of trades - consistently be profitable IF there was too much efficiency to gather edge
it is 100% correct, that markets adapt, since they are the aggregate of trader decisions and actions
that is why a GOOD trader adapts. edges exist for a time, then often vanish.
that is part of being a trader is doing the DD of the market itself to identify inefficiencies and opportunities and jumping on them
the market is, as you say, what other traders do.
the market, by its nature, will also make the most radical (and profitable) moves when it catches most people on the wrong side of the movement
again, that's not RANDOM
the point is - is the market SO efficient that no edge is available to the retail trader.
the answer is CLEARLY - no
and again, everybody is concentrating on charts. this says NOTHING about charting. you can gain an edge in the market without EVER looking at a chart.
all a chart is, is a visual model of past price behavior over time
if you can recognize value BEFORE most other people do, and buy when demand oustrips supply (or before it) and exit before supply outstrips demand, you will be profitable.
the idea that this is impossible is absurd
there is NO statistically possible way that i (and many other traders) could over THOUSANDS of trades - consistently be profitable IF there was too much efficiency to gather edge
it is 100% correct, that markets adapt, since they are the aggregate of trader decisions and actions
that is why a GOOD trader adapts. edges exist for a time, then often vanish.
that is part of being a trader is doing the DD of the market itself to identify inefficiencies and opportunities and jumping on them
thanks, bill
as one example, i have a list of about 20 different setups
what they are, essentially, is recognition that when certain market conditions come together, there is a statistical likelihood of a movement in one direction over another.
MOST are of the means reversion variety, which makes sense because this is CLEARLY a means reversion market (contrast with the 90's which was not), but one does not blindly go in and fade every up move or every down move. that would be stupid (and unprofitable)
some setups almost NEVER trigger. these tend to be some of the best setups. i have two that are over 90% winning trades, with a 2.5/2 risk/reward parameter (stop of 2.5 times the distance of the first target).
here is one HUGE edge that a retail trader has - over an institutional trader, a mutual fund, a market maker etc.
you have the choice to NOT trade. and sit on the sidelines and patiently wait for an opportunity. you are trading relatively small amount of capital (compared to , say , GS or Buffett) and can thus look for edges in smaller and microcaps that are outside the radar of the institutions (and thus, less likely to be efficiently priced)
as one example, i have a list of about 20 different setups
what they are, essentially, is recognition that when certain market conditions come together, there is a statistical likelihood of a movement in one direction over another.
MOST are of the means reversion variety, which makes sense because this is CLEARLY a means reversion market (contrast with the 90's which was not), but one does not blindly go in and fade every up move or every down move. that would be stupid (and unprofitable)
some setups almost NEVER trigger. these tend to be some of the best setups. i have two that are over 90% winning trades, with a 2.5/2 risk/reward parameter (stop of 2.5 times the distance of the first target).
here is one HUGE edge that a retail trader has - over an institutional trader, a mutual fund, a market maker etc.
you have the choice to NOT trade. and sit on the sidelines and patiently wait for an opportunity. you are trading relatively small amount of capital (compared to , say , GS or Buffett) and can thus look for edges in smaller and microcaps that are outside the radar of the institutions (and thus, less likely to be efficiently priced)