Trend Following Research

[Gabfly1]

Quote from marketsurfer:

...Without another edge...

As I understand it, you regard the markets to be random in nature. If that is indeed your view, and you accordingly place no value on preceding price action, then how could any form statistics provide you with a directional edge in a random environment? That leaves inside information as the only exploitable edge in an otherwise random market, as you perceive it. (Remember, I'm going with your assumptions of randomness here for the sake of argument.)

However, if useful inside information can indeed have a meaningful impact on price direction, since you seem to be relying upon such special information, or interpretation of it, as your edge, then for the duration of the impact of this special information, the price would not, in fact, remain random. It would be moving in accordance with the exploitation of the information edge until it played itself out. And so, even by your own interpretation of edge, unless it is instantaneous, there are pockets of non-random price behavior available for exploitation. The most basic tenet of TA is the search for contextually significant pockets of non-random price behavior. By your own standard of edge, such an environment must exist.

 

[The Big D]

Quote from Gabfly1:

By your own standard of edge, such an environment must exist.

Better still, I gave him an easily verifiable example of such an environment. Debate that continues as if such an environment doesn't exist is simply contrary to fact - the proof is there for everyone to see in on of the biggest and most popular instruments.

 

[marketsurfer]

Of course TA identifies these pockets of supposed non random behavior, but unfortunately you can only see it in the past. It has no relevance for the future.

I believe there is edge and that one can be succesful trading so I consider myself a Quasirandom walker. Randomness is based on your perspective to the market-- with an edge the randomness can work for you--- volatility arb for instance and othe directionless strategies can and do extract money from the market. Being skilled at interpreting the macro picture, news, events, mergers, corporate actions etc can all be an edge. Charts of randomness are mental masturbation like astrology.

 

[Butterball]

Without being aware of it, Marketsurfer is a proponent of the Efficient Market Hypothesis. In his limited mind, market returns can and should be modeled with random coin flips.

Heck if this was the 60s he'd be right in line for the Nobel Prize!

 

[The Big D]

Quote from marketsurfer:

Of course TA identifies these pockets of supposed non random behavior, but unfortunately you can only see it in the past. It has no relevance for the future.

Again, an argument contrary to fact. In the S&P system I presented, the EMA identifies trends in the present, and the position you take (or more frequently, keep) for the next week exploits that information into the future. And it works - better than fundamental market returns - and has done so for over 20 years AFTER the system was exposed to the public in print. Even more interesting, it's become MORE effective as time has gone on, unlike some trend following systems like the "turtles" system that more or less stopped working in the 90s.

 

[Gabfly1]

Quote from marketsurfer:

Of course TA identifies these pockets of supposed non random behavior, but unfortunately you can only see it in the past. It has no relevance for the future.

I believe there is edge and that one can be succesful trading so I consider myself a Quasirandom walker. Randomness is based on your perspective to the market...Being skilled at interpreting the macro picture, news, events, mergers, corporate actions etc can all be an edge. Charts of randomness are mental masturbation like astrology.

But against the very background you described, and as a self-proclaimed "quasi-random walker," are they in fact "charts of randomness," or are they at times the depiction of "edges" playing themselves out over time. Not instantaneous edges, but arguably ongoing ones that an attentive trader can latch onto. If you have special information and somehow manage to catch a move at its very onset (good luck with that), would there not be time for someone less plugged in to see a bit of directional price action taking form, the very price action that the very informed you are presently exploiting, and hitch a ride? Do you think that once the early riders are on the edge bus that no other passengers can come on?

Youy really don't take the time to think your own theories through to their logical conclusion, do you?

 

[Butterball]

Quote from marketsurfer:

volatility arb for instance and othe directionless strategies can and do extract money from the market.

Aha, so directionless or market neutral strategies can extra alpha out of a perfectly efficient and random market. But directional strategies (such as momentum/trendfollowing strategies) can not?

That's is so painfully contradictory, it's actually embarrassing and painful.

 

[The Big D]

Quote from Butterball:

Aha, so directionless or market neutral strategies can extra alpha out of a perfectly efficient and random market. But directional strategies (such as momentum/trendfollowing strategies) can not?

That's is so painfully contradictory, it's actually embarrassing and painful.

I agree it's painful, but it's a surprisingly common belief amongst a large number of traders, even many very profitable ones.

The mathematical fact is that if price movements in the underlying are randomly pulled from any distribution, you can't earn more than the inherent return from that distribution by trading ANY method. All methods give you (inherent return)*(leverage)-(costs)+(gifts given to you on fills by idiots) or worse.

Of course, proving that requires a fairly sophisticated grasp of probability, so the negation is a common belief.

 

[marketsurfer]

Quote from Butterball:

Aha, so directionless or market neutral strategies can extra alpha out of a perfectly efficient and random market. But directional strategies (such as momentum/trendfollowing strategies) can not?

That's is so painfully contradictory, it's actually embarrassing and painful.

Sure, directional strategies can work. Heck, what has the stock markets upward drift returned over the last 70 years?? 1000's percent....

However, they can just as easily fail depending on the directional guess. Remember, I am talking about the market as a whole, not the individual success or lack of success of its practioners.

 

[marketsurfer]

Quote from The Big D:

I agree it's painful, but it's a surprisingly common belief amongst a large number of traders, even many very profitable ones.

The mathematical fact is that if price movements in the underlying are randomly pulled from any distribution, you can't earn more than the inherent return from that distribution by trading ANY method. All methods give you (inherent return)*(leverage)-(costs)+(gifts given to you on fills by idiots) or worse.

Of course, proving that requires a fairly sophisticated grasp of probability, so the negation is a common belief.

Take a randomly generated chart. Make a good guess, go long right before a 20% run up. Guess right again and take your profits. Then the random up move drops, you don't trade again thereby beating the inherent rate of return generated by the random (Quasi) chart.

In other words, luck will cause some traders to be successful regardless of randomness or lack there of.