Why do I see "Trends" in Randomly Generated Data?
- Thread starter Rahula
- Start date
If any of you were to see in health care stocks in late september would any of you consider trading them in the direction of the trend. What what your risks be.
I know someone who made a lot of money with this during the clinton years trading health care stocks.
I remember 10 years or more ago when housing sector stocks started to outperform, even though the pundits stated it should not be happening.
If you actually spoke with builders... they knew.
To argue trends are not real is to deny how markets work.
When the nasdaq 100 was trading at highs even though as a whole they were losing money... could someone have predicted a trend worth shorting was about to happen?
Trends exist if you are smart.
The markets have an element of randomness and non-randomness. On an intra-day basis the market is largely random and as such, statistical analysis should be the primary tool. That being said, however, one shouldn't throw technical analysis out the window because it is also a useful tool even in a random environment. The average day trader, or any trader for that matter, tends to focus his strategy on technical analysis and nothing else. This type of trader is certain to fail. How could such a trader compete with banks that have super computers crunching numbers in stochastic calculus, time series analysis, etc., type systems?
Banks do not day trade other than in forex but that is commercial transactions. Banks do value investing for clients. The technical traders when competing with value traders always lose. This is a cardinal rule of the market.
Most trends are random motions and involve no value this is why technical trend traders always lose to value traders who know where the real trends are.
You can see how a technical trader can be fooled by systems that historically generate upward slopping equity curves if you go to price action lab blog and look for the post "Fooled by Randomness Through Selection Bias". There is a link to a java applet where you can see how random games can produce nice trends.
I fail to see how statistical trading is different from t/a in many cases.
If I am looking at a couple of pairs and figure they should regress to the me after a two standard deviation move apart. How is that different than plotting their difference on a chart and putting bollinger bands around it.
If I do this on big groups of stocks...
I would have been a very successful hedge fund a decade ago.
And this worked great for daytrading in the 90s as well... same concept on an intraday bases.
Arbing stocks back into line with the correct index on 1 minute or 5 minute charts. I was one of a few dozen traders who made 6 figures a year doing that in up and down markets. (Although sometimes I also looked for a short squeeze which would take the stocks even more out of line.)
If I am looking at a couple of pairs and figure they should regress to the me after a two standard deviation move apart. How is that different than plotting their difference on a chart and putting bollinger bands around it.
If I do this on big groups of stocks...
I would have been a very successful hedge fund a decade ago.
And this worked great for daytrading in the 90s as well... same concept on an intraday bases.
Arbing stocks back into line with the correct index on 1 minute or 5 minute charts. I was one of a few dozen traders who made 6 figures a year doing that in up and down markets. (Although sometimes I also looked for a short squeeze which would take the stocks even more out of line.)
Trend means by definition non random movement. How trend can be random then?
The question is to distinguish real trend from something that is random movement but looks like a trend. Here TA will not help much because it relyes on the outlook which is the same. Something else must come in addition??
The question is to distinguish real trend from something that is random movement but looks like a trend. Here TA will not help much because it relyes on the outlook which is the same. Something else must come in addition??
Quote from epetrov:
Trend means by definition non random movement. How trend can be random then?
The question is to distinguish real trend from something that is random movement but looks like a trend. Here TA will not help much because it relyes on the outlook which is the same. Something else must come in addition??
The missing link is fundamentals and fundamental drivers of volatility.
The main driver for currencies is interest rate expectations , actual cuts and rises in interest rates or expected cuts and rises in interest rates.
If you look at the euro/usd chart for last three days , the moves and down trend line was not random , but currency traders selling the euro ahead of the expected cut in interest rates.
Historically , value and fundamental systems out perform random volatility systems based on technical analysis..
The element of non randomness is about 1%. It has been proven that the markets experience a so called random walk. It is about 99% random walk and about 1% non randomness.
If you generate a chart with 50% RM and 50% non random, it will NOT look like charts we know (it would look too perfect).
The supporters of random walk claimed markets are 100% random, but later (in 80s, 90s and today) the scientists lean more towards that it is very slightly non random.
Random charts (99% or 100%) look exactly like charts we know.
And it's not about intra day or daily, because they are the same charts, the same price, there is no difference between a daily chart and 10 second charts, because it's the same price. Has nothing to do with it.
Also about HFT. As a normal retail traider you can't compete with HFT in Forex. Those guys make profit while your price does not even move. That is the reason forex is so hard today on scalping, HFT level. Price might move one way and never look back. A very thin movement where, however, hft makes money trading both ways (counter trend), while you as a retailer can't do that, because your commissions and spread are too high.
However, you should be able to compete with HFT in futures, where tick size is universal for all.
I think you are having a hindsight bias. Yeah, asking builders. You do know there are traders out there who ask this and they fail?
I know also someone who made money off health stocks. But those are 1% of people, the rest failed somewhere else. You just pick a winner and show him into my face, here, I have a winner, it works. That's BS man.
I never told trends don't exist, where did I say it? I stated they do exist, but they are random. You can't know for sure which will be the trend in the future, because some little piece of information can end that trend in an instant. Like imagine all of a sudden huge oil reserves will be found somewhere deeper in earth of amount of 10x the current estimated reserves of the earth and the crude light is $110. That's a good buy for the trend.