What if I think the Market is totally Random

[ranger64]

markets are chaotic and wild, but definitely not random.

read this:

The Misbehavior of Markets
by Benoit Mandelbrot (Author), Richard L. Hudson (Author)

 

[paperboy]

Quote from Voodoo-king:

Every trade have influence over future trades, but does that also mean it decides future trades?

Sometimes there are 90% probability trades available. Maybe always if one understand how to read them. But if there is a shock with for example a news then a new future is created.

But maybe that news event was highly predictable as well.

 

[Maharaja]

Quote from Voodoo-king:

Chaos and randomness would be created?

Basically.

Nothing is really random when you think about it. For example, the weather. Years ago (without the weather channel/technology) it seemed random. But now that we have some data we can predict the weather to a certain extent. With ALL the data, we could predict it with 100% accuracy.

But with the markets (assuming that they are weak and strong form efficent...) everyone has the same set of data at the same time. And soon after something new is discovered that is not known to the general public then the market becomes more predictable to one than another. That's until everyone else graps a hold of that knowledge and the markets become "random" again...

So that's why you need to ask how the market's aren't random and trade there. Everything looks random until it's discovered. There is nothing in this world that is random. But that's a whole other philosophical debate.

 

[Cutten]

Quote from IdontGoogle:

Can I still trade successfully with that perception of the markets.

Yes, but only if your trading system is inconsistent with your beliefs, AND the market is actually nonrandom, AND you are able to avoid psychological screwups as a result of the obvious conflict.

Looking at the number of great traders who believe the market is truly random, your odds of success are not good.

 

[IdontGoogle]

Quote from Steve Tvardek:

Maybe if we had an example....

from 11:00 to 11:01 the following orders are entered for AIG stock on the NYSE......


Joe the daytrader sees a nice spring off R1 and decides to buy 1000

--This is not random, Joe decided to buy because of some technical setup.

Grandma sally has a forced liquidation to raise cash for her IRA distribution. 150 sold

--This may be random, but 150 shares of AIG isnt going to make or break the stock.

Goldmen sold 2000 as part of some arb program.

--I'm sure Goldman doesnt just sell 2000 shares arbitrarily, they must base their buy/sell programs off of the futures or the financial sector or whatever. So there decision to sell is not random.

Money Manager Acme investments is buying into portfolio and is working a vwap program buys 3500

---Again, not random. The VWAP is based on volume and price.

Tom the swing trader is taking a nice profit from 5 weeks ago
sells 2300.

---A swing trade does not just sell 2300 shares on a whim, Tom most likely has a plan to get out of his swing trade either into strength or into weakness (predicatable human patterns). If the stock was completely rangebound (ie stock is in a .10 range for 3 hours) and Tom sold then, then his 2300 shares would easily be eaten up without causing the stock to move (in this case there is a buyer and seller at very close levels so the stock doesnt make any significant moves)

etc..............

So, in my opinion, 4 out of 5 are not random at all. The only one that could be random is grandma's 150 shares. Then again, if grandma was swinging a bigger line, I'm sure her exit wouldnt be random either.

I think I see what you're saying. Most trades are placed for a reason and can be attributed to some belief about the stock. Wether its a technical reason, a complex or simple buy/sell program, a stop order..etc. Its not like people are putting on a blind fold and hitting the buy/sell button here and there.

 

[thenewguy]

Quote from Cutten:

Yes, but only if your trading system is inconsistent with your beliefs, AND the market is actually nonrandom, AND you are able to avoid psychological screwups as a result of the obvious conflict.

Looking at the number of great traders who believe the market is truly random, your odds of success are not good.

What great traders think that the market is truly random?

TNG

 

[acronym]

Quote from gnome:

Much of the market's action appears random. Some appears not. Play the not.

Hmm.

I think I'm paraphrasing another poster, but if you think the market is completely random, you should use a strict rule based method-

And if you think it is highly ordered and structured, you should use a close- enough to random method for best results.

Thoughts?
I doubt this applies to quants though.

 

[fletch2]

So having said that, are there strategies that will make you a winner if you believe markets are totally random?

Define "totally random." I believe one glance at the Dow from inception to date should provide some evidence that it is not entirely random.

Fletch

 

[Steve Tvardek]

Exactly!

Quote from IdontGoogle:

I think I see what you're saying. Most trades are placed for a reason and can be attributed to some belief about the stock. Wether its a technical reason, a complex or simple buy/sell program, a stop order..etc. Its not like people are putting on a blind fold and hitting the buy/sell button here and there.

 

[RhinoGG]

The market is a "tool" best used by those skilled, often used by those that are not. Each instrument is like an arrow in one's quiver. Find target, aim, shoot!