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Why predict?
- Thread starter EmRock
- Start date
Quote from nitro:
I am currently not live trading on a large scale. The trading that I do at this point is vol/skew "arbitrage" (mispricing is perhaps a better term) - it is 100% research so done with small size. I am gearing to manage OPM within the next three months. It will be 100% ATS and assumes the underlying is a random variable.
The firm I work for currently prints money. It assumes the underlying is completely random. I am in contact with people that work for several large firms downtown chicago. They all assume a random underlying to a great extent.
nitro
If you believe markets are random you are wrong. There is statistical proof that markets trend more often than not.
A while ago Richard Farley, one of the top traders at BT in Sydney who went on to run his own hedge fund based in Bermuda, ran computer tests on a broad range of markets to see how often markets continued in their current direction compared to reversing. He found that on average there were 55% continuations to 45% reversals.
Those results are hardly surprising. Most experienced traders realise trends exist and so markets are not completely random as some suggest.
The firm I work for currently prints money. It assumes the underlying is completely random. I am in contact with people that work for several large firms downtown chicago. They all assume a random underlying to a great extent.
nitro
When you talk about "the underlying" in this particular context what exactly is it that you are referring to? The momentary movement of price? The lack of predictability of the direction of movement of price? Something else?
When one assumes this "model" (the underlying is completely random), one must then construct a mathematical edifice to represent it and regrettably, the B-S is still touted as the paradigm. LTCM says otherwise. The wings are fat.
So when JH comes along and says scrap the probabilistic notions and offers something tangible and testable in lieu of B-S, it is indeed refreshing. Where JH errs, IMO, is with his assumption that his binary, non-probabilistic method is the singularly unique solution to the market dynamic (perhaps I overstate his case here - I don't know, but I'm sure, if he wishes, he will let me know). I do not believe that it is but I also would be the first to say that his method is a good one.
While I may think that price is going from A to B, I have absolutely no idea about two things: Whether or not it is going from A to B and exactly how it is going to get there (what path it is going to follow). If I do anything other than respond to what the market is doing, then whatever it is that I am doing is indeed, crap.
lj
Quote from LondonUSTrader:
If you believe markets are random you are wrong. There is statistical proof that markets trend more often than not.
A while ago Richard Farley, one of the top traders at BT in Sydney who went on to run his own hedge fund based in Bermuda, ran computer tests on a broad range of markets to see how often markets continued in their current direction compared to reversing. He found that on average there were 55% continuations to 45% reversals.
Those results are hardly surprising. Most experienced traders realise trends exist and so markets are not completely random as some suggest.
If one believes that the markets are random, it follows that he also believes that human behavior is random.
LC
Quote from Lamont_C:
If one believes that the markets are random, it follows that he also believes that human behavior is random.
LC
Yes, human behaviour is quite random. You can never predict what and when people would demand one thing or the other, thus when demand becomes greater than supply (or vice versa) it causes price uptrends and downtrends. The human behaviour may be random, but the price isn't.
Yes, human behaviour is quite random.
So would you say then that your behaviour is quite random to you, or is it rather, your behaviour is random to someone who is trying to figure out what you are going to do? Probably the latter and so a possible question then might be: Is there a segment of the market which like you, knows what they are going to do, with price, and another segment outside of you which is trying to figure that out? How would one incorporate such things into "the market is random" model? Why of course by assuming that there are groups of people who know what they are going to do, with price and, importantly, they never agree with each other. But does that make common sense?
lj
Quote from Pekelo:
For the last time, it is all about semantics. You arrive at a Stop sign, look around and then when nobody is coming proceed crossing the intersection. You say, you are driving a car. I say, you are predicting that you have the right of way and nobody is going to crash into you, because they are most likely (you are hopig,predicting,expecting) will folow the rules of the road.
We are both right. Again, it is all semantics....
You are incorrect.
Feel free to follow your beliefs. They are unfortunate.
Your example of the car, the driver, the intersection, the rules of the road and, most of all, the time involved is easy to rebut step by step from a trader's viewpoint who is making money by not predicting.
There is no point in informing you, however.
Semantics, is a topic that you put on the table. It is certainly a way for you to do what you want to do.
On the other hand making money deals with a reality that must be dealt with systemically. The market structure, process and the results the market generates is what is on the table. A trader connects to this via accounts, his money that is used to make money and most of all how he trades. There is no prediction requirement in this either as a model, a process for trading or in the results that pile up in the trader's account as he makes money.
Most people never come to understand this. You are one of them. that is going to continue for you for the future. We look at you and see you in a trap; caught in the trap as an amimal would be who screwed up. Animals caught in traps get to go through the consequences of getting caught in a trap. They do understand as they sit there awaiting the next step in the process as a situation that is not one of semantics. they can figure out that sematics is not part of the trap in which they are caught. there is not button on the trap that they can press and be freed to go about their business once again.
You can count the words in this and see if this time out it took me less words to give you the information that you are incorrect.
Quote from ljyoung:
So would you say then that your behaviour is quite random to you, or is it rather, your behaviour is random to someone who is trying to figure out what you are going to do?
I'm not talking about a single person but about the whole population. You never know when or where a new invention, fad or fashion will spark and cause social and business trends. Now you look back and see: yes, there was dot com boom. Yes it ended. But back then, who could predict that such things would happen? You see, human behaviour is unpredictable. Could you know in advance that the crash is coming? Not talking about predicting on what date it will come.
The price isn't random, you oculd see trends and trade them, but you cannot predict where they start and end, otherwise you could be acused of being top/bottom picker, but as we all know, nobody in the world can predict such things.
Quote from Indrionas:
Yes, human behaviour is quite random. You can never predict what and when people would demand one thing or the other, thus when demand becomes greater than supply (or vice versa) it causes price uptrends and downtrends. The human behaviour may be random, but the price isn't.
Human behavior is as predictable as the tides. And since behavior determines the movement of price, one cannot say that one is random and the other is not.
LC