# Profiting from randomness: A money management system?



## Naked shorts (16 August 2009)

I came across this article which basically refutes the idea that randomness cannot be profited from (as suggested in the well known book "A random walk down wall street").
What I found most interesting about this article is that a money management system can actually provide an edge. I have always been under the impression that no amount of money management can turn the odds in your favor (think roulette and all the suckers who think they can win).
So can MM actually provide an edge? or is the article flawed?

http://www.isigmasystems.com/implications.html



> Malkiel's model
> 
> In his classic, A Random Walk Down Wall Street, Burton Malkiel argues that markets follow a random walk. To illustrate what he means by random walk, he provides example charts generated by tossing a coin. Depending on which way the coin fell, the market would move up or down. An anecdote in the text describes a chart analyst's excited reaction to these faux price charts. Malkiel's point here regarding chartist techniques is not without merit, but we have some other concerns with Malkiel's stance.
> 
> ...


----------



## MichaelD (16 August 2009)

*Re: Profiting from randomness - A money management system?*

Plenty here profit from randomness. Most falsely attribute this to skill rather than luck. A very small number of posters here skillfully profit from randomness.

And then there's the other issue with these models, which is to assume a normal distribution of returns from a market and no bias, both of which are false assumptions and both of which are exploited by successful traders. (Long tails and the overall upwards bias of equity markets.)


----------



## gooner (16 August 2009)

*Re: Profiting from randomness - A money management system?*

1% compound returns upwards is a bigger win than 1% compound return downwards. So upwards bias is built in the model as it is in real equity markets


----------



## Amor_Fati (16 August 2009)

*Re: Profiting from randomness - A money management system?*

They have constructed a model where the average win (1/100) is bigger than the average loss (1/101) with equal probabibilty. This is assuming that the market will rise over time, which it generally does, but that is why going long is profitable. 

For a simple illustration think of the average after 2 days. There are 4 possibilities UU, UD, DU, DD with payoffs of 1.0201, 1, 1 and 0.980296. Obviously if you add those up you get more than 4 and hence the average is over 1. So to profit from randomness is pretty easy in this model, you just buy, hold, sell. It's implications for trading seem limited.


----------



## tech/a (16 August 2009)

*Re: Profiting from randomness - A money management system?*



MichaelD said:


> Plenty here profit from randomness. Most falsely attribute this to skill rather than luck. A very small number of posters here skillfully profit from randomness.
> 
> And then there's the other issue with these models, which is to assume a normal distribution of returns from a market and no bias, both of which are false assumptions and both of which are exploited by successful traders. (Long tails and the overall upwards bias of equity markets.)




Michael.

Do you see both entry and exit as random?
Do you believe placing yourself in a position prior to a forward move is no better than 50/50 proposition (over what term--week,month,year?).


----------



## motorway (16 August 2009)

*Re: Profiting from randomness - A money management system?*

In the sort of Random Walk
That could apply to a market ( Not these one step fits all + metronome )

You most likely end UP where you start
and The probability of a step of size s is related to the square root of step s

Seeing both of those statements do not apply to stock markets

*It is a useless model*

All you are left with is 

1) Don't PLAY
or 2) If there is a biased drift ,PLAY but entry does not matter exit does not matter  --->Just correct money management makes the difference ( gamblers ruin etc law of small and large numbers 

HOWEVER
seeing it is NOT TRUE

Then Entry matters & Exit matters
IE *TIMING MATTERS*
Because *TRENDS MATTER * _ssshh because they exist_

But the Entry that matters is not a matter of  how
But more a case of  into ( and out of ) WHAT..

motorway


----------



## MichaelD (16 August 2009)

*Re: Profiting from randomness - A money management system?*



tech/a said:


> Do you see both entry and exit as random?
> 
> Do you believe placing yourself in a position prior to a forward move is no better than 50/50 proposition (over what term--week,month,year?).




Really big, deep questions here. Here's the beliefs that I trade:

Charts are random. Traders are not random. Many traders use charts to trade.


----------



## Mr J (16 August 2009)

*Re: Profiting from randomness - A money management system?*



MichaelD said:


> Really big, deep questions here. Here's the beliefs that I trade:
> 
> Charts are random. Traders are not random. Many traders use charts to trade.




You say that charts are random, and that the participants are not. If you believe the participants do not act randomly, how can you believe that the charts - which are graphical representations of the participants' actions - are random? You then suggest that the participants give value to the charts when they use them. I suggest that the charts are always usable, since the price action was never random.


----------



## brty (17 August 2009)

Random is a floored concept, I do not believe in it.

This should not be taken as a belief that it is possible to make fully accurate predictions, as rarely do we have all necessary information.

brty


----------



## Timmy (17 August 2009)

brty said:


> Random is a floored concept,




Those who propound it should be called on the carpet.


----------



## beerwm (17 August 2009)

*Re: Profiting from randomness - A money management system?*



MichaelD said:


> Charts are random. Traders are not random. Many traders use charts to trade.




Do you want to clarify this?

- cause I find it contradicts itself.
Charts reflect Trades, so...
non-random trades = non-random charts.

--just not sure what you're getting at.


----------



## tech/a (17 August 2009)

*Charts are random.* ---Have no reliable reoccurring information for trading


*Traders are not random*.----Psychology is reoccuring and reliable


*Many traders use charts to trade*.----Read the psycology not the chart.

My take on Michaels deep and meaningful.


----------



## Nick Radge (17 August 2009)

> Have no reliable reoccurring information for trading




Yes they do. 

Trends.


----------



## Sugar Dunkaton (17 August 2009)

Everyone knows that sentiment plays a part in market direction. 

Everyone also knows that a coin flip is an independent random even with the outcome unbiased by the previous result.

Therefore trying to use randomness to explain market moves cannot work.


----------



## schnootle (17 August 2009)

Debating whether the markets follow a random walk is an open question, fine. However i am always going to be suspicious about any one telling me you can profit from a random walk. This all sounds a bit like a brownian ratchet, ie a perpetual motion machine gaining postive net kinetic energy from particle brownian motion.

en.wikipedia.org/wiki/Brownian_ratchet


----------



## mazzatelli (17 August 2009)

schnootle said:


> Debating whether the markets follow a random walk is an open question, fine. However i am always going to be suspicious about any one telling me you can profit from a random walk. This all sounds a bit like a brownian ratchet, ie a perpetual motion machine gaining postive net kinetic energy from particle brownian motion.
> 
> en.wikipedia.org/wiki/Brownian_ratchet




It looks more like a loose attempt at a binomial tree step. Regardless of step or GBM/Levy, the model is more practical for pricing than trading pruposes.


----------



## beamstas (17 August 2009)

I'm yet to see proof that entries give you an edge.

With a simple type of trend filter for the market and a simple trailing stop, you'd be suprised at how well random entries on random stocks can work.

I do believe there are people out there who can get an edge with their entry, but the vast majority of people will simply backfit an entry from what they have seen on a chart.


----------



## brty (17 August 2009)

Sugar,

Even this bit is totally wrong.....



> Everyone also knows that a coin flip is an independent random even with the outcome unbiased by the previous result.




A coin flip is not a random event and is easily proven not to be, yet most people think it is.

brty


----------



## beamstas (17 August 2009)

brty said:


> Sugar,
> 
> Even this bit is totally wrong.....
> 
> ...




Huh?


----------



## Sugar Dunkaton (17 August 2009)

Might be a bit off topic, but I am definitely interested in learning how a coin flips outcome is dependent on the outcome of the last coin flip outcome. Every little bit of information I have ever collected tells me that coin flips outcomes are independent of each other.


----------



## beamstas (17 August 2009)

Sugar Dunkaton said:


> Might be a bit off topic, but I am definitely interested in learning how a coin flips outcome is dependent on the outcome of the last coin flip outcome. Every little bit of information I have ever collected tells me that coin flips outcomes are independent of each other.




Its is never dependent on the previous flip, i'd be suprised if he tried to argue that.

I think he is trying to say that the flip of a coin is non random due to thing such as gravity, force being used to flip the coin, the height you toss the coin, the type of coin used etc.

It may be possible to compute the outcome given none of those factors are variables, but since all inputs will be variable for every single toss it is as close to being pure randomness as possible.


----------



## motorway (17 August 2009)

beamstas said:


> I'm yet to see proof that entries give you an edge.
> 
> With a simple type of trend filter for the market and a simple trailing stop, you'd be suprised at how well random entries on random stocks can work.
> 
> I do believe there are people out there who can get an edge with their entry, but the vast majority of people will simply backfit an entry from what they have seen on a chart.




yes I think most back testing for entries is just that


But consider

Given one of these entries
and lets say at an identical time
you get a signal on TLS
and another on XYZ promising small cap ( eg bio tech or mineral explorer )
are the outcomes identical
in terms of expectation

is there more to entries than just HOW ?

and what of TALEB 
point of disconfirmation

Can you have a  signal to tell YOU NOT WHAT TO GET INTO

Is there an edge to be found there ?
and should you go short there ?
and should your long  universe be only those stocks that
are not signalling a  NO ENTRY
and yes it is all about Trend Filters
But are there better filters

and are there No-trend filters ?
Would one of these be useful ( again  disconfirmation )

Thinking in terms of coin tosses
where the bias on the coin is created by the bets people make on the coin
Is the type of  thinking  that will take you very far..



motorway


----------



## overit (17 August 2009)

Just to add my 2cents worth I believe the market is fairly random but has a bias built in. There is an obvious upside bias in favourable market conditions and a downside bias when things are crappy. Ie why does the market go up when the economy is going well.

I did an interesting experiment with my roulette numbers collection. Obviously I would like a larger statistical base than 400 numbers but it is enough to give you the idea. I just wanted to see what a random number graph would look like. I used my hoyle casino pc game as a random number generator. 

The 3 line graphs are black vs red, odd vs even and high vs low. I associated value "1" vs "-1" to these. With zero given a "0" value. Ie if it is 50/50 black/red the total sum should be 0. (Correct me if I am wrong.) I honestly thought I would not see a trend develop with 50/50 outcome possible. 

Definetly food for thought. Do I see support/ resistance points, double tops... LOL!


----------



## motorway (17 August 2009)

If it is 50/50 black/red the total sum should be 0 ( But ) + or - 20 ( with 400 and average of mutiple runs)
big HINT how to build a trend filter in that 

BUT BE CAREFULL

Epileptic FIT 

model that with coin toss too
But the same "Pattern" 
while not predicting the next coin toss
will predict the next Fit

Just because a random sequence can produce a pattern
does not mean in another context that the pattern has no meaning too

Also read Mandelbrot on How
stock fluctuations are different to Coin Fluctuations
he covers that difference well

same with earthquakes and coin tosses

and stockmarket and coin tosses
The dynamics of a top of a Bull market are real and exist
there is no top and no dynamics ( regime changes )
on your charts
JUST random walks

motorway


----------



## brty (17 August 2009)

> I think he is trying to say that the flip of a coin is non random due to thing such as gravity, force being used to flip the coin, the height you toss the coin, the type of coin used etc.




You think correctly here..

Not so accurate here though..



> It may be possible to compute the outcome given none of those factors are variables, but since all inputs will be variable for every single toss it is as close to being pure randomness as possible.




Why do people equate difficulty to predict with random?? How do you know 







> since all inputs will be variable



 Does "variable" mean random?? What if some input was deliberately changed each toss??

I first woke up to how un-random things are by tossing a coin while trying out a new system for commodity trading. By giving the coin a toss with quite few   revolutions, probably about a foot high into the air, I scored 20 heads in 25 tosses. Thinking this ridiculous, I started again, this time with tails up on my finger, I had heads up the first time. The result was about 15 tails in a row before I gave up as I was not getting anything close to "random". Only by deliberately changing the force of flip was I able to get results approaching 'random'. 

My argument is about how an input that is controlled can be classified as 'random'. 

By controlled, I mean by force applied in the coin tossing case, but everything else that is considered random also has 'force' of some type or description applied. (a computer random number generator is simply a function of the algorithm applied)

I have not seen anything that could be described as 'random' and do not believe in the concept. 

brty


----------



## beamstas (17 August 2009)

brty said:


> Why do people equate difficulty to predict with random?? How do you know  Does "variable" mean random?? What if some input was deliberately changed each toss??
> 
> I have not seen anything that could be described as 'random' and do not believe in the concept.




This is like you see on news.com.au.
Backfit ideas around why a random event occurs, that would have made the event completely foreseeable if you had the information at the time, but is not useful for predicting a future event.

I think you are confusing calculating and backfitting a random event with actual randomness.

Probability is simply accepting the fact that alternate events could occur, not the actual computation of why they did occur.


----------



## brty (17 August 2009)

beamstas,

When you understand why the different events occur, you have a better handle on the probabilities.

Could you please give an example of just one "random" event and of course why it is considered "random".

brty


----------



## ThingyMajiggy (17 August 2009)

Whats the big deal about if its random or not? 

Whether you can profit from it is the main thing I would have thought, whether it be random or not? 

Charts are just visual representations of the effort and result of the traders/investors involved. Traders aren't random.


----------



## MichaelD (17 August 2009)

tech/a said:


> *Charts are random.* ---Have no reliable reoccurring information for trading






Nick Radge said:


> Yes they do.
> 
> Trends.




My view is that any given chart looked at in isolation provides nil information as to what will happen next.

i.e. Will tomorrow be up/down/sideways? Not knowable from a chart.
i.e. Has a trend started? Are we mid-trend? Has a trend finished? Not knowable from a chart except in hindsight.

If sufficient people look at the chart and believe it means something, therein lies the genesis of a potential non-random event (= potentially profitable event with appropriate trade management), but these are mere ripples in the sea of randomness.

Trends arise in random series and are exploited by trade/money management. Fortunately the market throws out trends more often than expected as the market does not exhibit a normal distribution of returns. You still exploit them with trade/money management though.

All profitable traders do is ride the "good" outliers whilst cutting the "bad" outliers. All the rest is simply noise.

That's why "everything works, and yet nothing works" in the markets.


----------



## motorway (17 August 2009)

> Will tomorrow be up/down/sideways?




Wrong question to be asking


motorway


----------



## brty (17 August 2009)

motorway,



> Wrong question to be asking




agree 100%

brty


----------



## brty (17 August 2009)

Michael D,



> Trends arise in random series




Could you please give one example of a random series??



> the market does not exhibit a normal distribution of returns




Hence not random, by the definition of random.

brty


----------



## MichaelD (17 August 2009)

motorway said:


> "Will tomorrow be up/down/sideways?"
> 
> Wrong question to be asking




Totally agree, but it is the question most asked of a chart.



brty said:


> Could you please give one example of a random series??



The sequence of Boys/Girls born in Australia in 2008.

This produces a binomial distribution, not a normal distribution There would be many, many runs of 10 boys or 10 girls in a row in this dataset. i.e. trends within a random series.

Random <> normal distribution of results.
Random = unpredictable outcome.


----------



## brty (18 August 2009)

Michael D,



> Random <> normal distribution of results





> This produces a binomial distribution, not a normal distribution




Ok, sounds like I don't have to add anything here.




> Random = unpredictable outcome.




A man walks out of the forest for the very first time, with no previous contact with modern man. He sees a strange low flat black rock extending in either direction as far as the eye can see. It has a white  line down the middle. He then sees these strange metal boxes with people trapped in them going one way or the other. 
Whilst carefully observing he notes what he thinks a pattern with where most come from, but further observation later in the day 'proves' it wrong. The final count being 1000 metal boxes going each way with a random pattern that seemed to 'trend' at one point.

The following morning while observing this strange phenonomen another person walks up to the forest man and mentions "peak hour's a bitch isn't it" .

Not knowing how to calculate all the variables does not make an event "random". The sequence of Boys/Girls born in Australia in 2008 only appears random to you as you do not have all the information necessary to determine the outcome. Certainly many variables to be known to work out such a sequence, but if it was "random" then some of the lengths of pregnancy, with the large sample, would approach "infinity" to be truely "random". 

Do you know of any women who have had a successful pregnancy that approached infinite time in length??

brty


----------



## Timmy (18 August 2009)

motorway said:


> Thinking in terms of coin tosses
> where the bias on the coin is created by the bets people make on the coin
> Is the type of  thinking  that will take you very far..
> 
> ...




I like this, a lot.



brty said:


> I first woke up to how un-random things are by tossing a coin while trying out a new system for commodity trading. By giving the coin a toss with quite few   revolutions, probably about a foot high into the air, I scored 20 heads in 25 tosses. Thinking this ridiculous, I started again, this time with tails up on my finger, I had heads up the first time. The result was about 15 tails in a row before I gave up as I was not getting anything close to "random". Only by deliberately changing the force of flip was I able to get results approaching 'random'.
> 
> My argument is about how an input that is controlled can be classified as 'random'.
> 
> ...




Interesting stuff thanks brty.  Not many people bother doing an actual test of ideas like this and the results are sometimes surprising.  However, would you accept that some things are not knowable/controllable and thus for practical purposes best described as random?  I am thinking of an explanation on www.random.org ("The randomness comes from atmospheric noise").  Don't know if I am getting too far off topic here ... or if what I am saying is relevant to trading.


----------



## brty (18 August 2009)

Timmy,


> would you accept that some things are not knowable/controllable and thus for practical purposes best described as random?




Of course there are many things that I don't know or would be extremely difficult for anyone to know, given current technology. Things don't have to be 'controllable' to be non-random. All you need is a past performance and a knowledge that 'something' is having an effect on the outcome. The more knowledge of the 'something' and its behaviour the more predictable the outcome for any individual. However more or less knowledge does not change the nature of the behaviour, just the perception of what is happening from the individual perspective.

For example, with the previous coin tossing of mine, if you had no knowledge of that and met me in a bar and I offered you 2 to 1 odds on the flip of a coin. You get to inspect the coin, to make sure it is not biased, but I get to flip and call. You think it is random, I know it is not. After playing against me, and losing all your money, would you come back again to play tomorrow, or would you have learnt something about "random" coin tosses?? 


atmospheric noise = chaotic behaviour.

I was wondering when someone would bring that up. What makes something chaotic? To me it equals not having enough information to calculate something, not that the event is 'random'.

brty


----------



## Timmy (18 August 2009)

Thanks brty


----------



## ducati916 (18 August 2009)

Interesting discussion,

The stockmarket is a stochastic process. That is a sample path leading to an outcome. A random stochastic process does not have an equiprobable outcome.

A sample path in the market would be the movement of US Steel from $225/share to $17.66/share with every [day] price along the way.

Non-equiprobable would refer to say earnings [one example] increasing or decreasing, relative to current price, weighting the probabilities.

Thus, some outcomes will have higher probabilities than others. A stochastic process also refers to the dynamics of events that unfold, or reveal themselves with the passage of time, or the future.

Thus the unbalanced probabilities, are only able to be calculated IF you can predict the future.

If we are agreed that [currently] no-one can predict the future, then, the stockmarket [prices] are random.

jog on
duc


----------



## MRC & Co (18 August 2009)

brty said:


> I was wondering when someone would bring that up. What makes something chaotic? To me it equals not having enough information to calculate something, not that the event is 'random'.
> 
> brty




I would have to side with this guy.

It is staggering how consistently many beat the market, without the use of any kind of traditional money management.


----------



## beamstas (18 August 2009)

MRC & Co said:


> I would have to side with this guy.
> 
> It is staggering how consistently many beat the market, without the use of any kind of traditional money management.




If the market is random, not using money management =/= not profiting.

There will be some lucky fools, some unlucky fools, and some people who actually can profit from randomness.

Just to add to the discussion, I'd argue that short term the market is less predictable than long term.

Tomorrow the market could be up or down, it's pretty close to a 50/50 chance.

But in the long term, the chance of the market being up, say over the next 10 years, is most likely higher than a 50/50 chance.

Regards
Brad


----------



## Frank D (18 August 2009)

Randomness can only come from the reliability of the pattern working, resulting in an outcome
 and end result that is random.

Tossing a coin is a reliable pattern, but the outcome and end result is 
random.

Certain chart patterns are reliable, however the outcome and end results 
are random.

Traders trade those patterns but never know the outcome until the 
end result. We work with probabilities. (profit and loss)

The random outcome is not the actual pattern because the pattern is reliable, but how much ‘profit’ 
is taken from that pattern in sequence, and how much is risked.

The clear majority of academics can’t find ‘reliable patterns’ so they 
accept the notion that the market is totally random and price patterns 
are random and traders can’t beat the market.

Price patterns aren’t random, trends aren’t random, they are reliable, but 
the end result and outcome is random because of the decisions the 
trader makes at any given time.

Crap trading strategy, or trading via the game of 'probability'.


----------



## tech/a (18 August 2009)

Frank.

Your claiming to have a statistically reliable varifiable pattern?--AGAIN.
Havent seen these stats!

Or are you generally speaking--if there was one it would then be--


----------



## Mr J (18 August 2009)

tech/a said:


> *Charts are random.* ---Have no reliable reoccurring information for trading
> 
> *Traders are not random*.----Psychology is reoccuring and reliable
> 
> *Many traders use charts to trade*.----Read the psycology not the chart.




His post does not make sense, if we are defining random to mean unpredictable. If traders use the charts, then the charts have value, and therefore can *never* be random. Martet psychology is shown in the price action, and therefore can be shown on a chart (although other information may also be needed).



beamstas said:


> I'm yet to see proof that entries give you an edge.
> 
> With a simple type of trend filter for the market and a simple trailing stop, you'd be suprised at how well random entries on random stocks can work.
> 
> I do believe there are people out there who can get an edge with their entry, but the vast majority of people will simply backfit an entry from what they have seen on a chart.




Without decent entries, I'd be stopped out more often, and my R:R would suffer significantly. I'd be suprised if random entries would be +ev. What do you mean by random entry? Spotting a trend or something and getting on regardless of the price? 



Sugar Dunkaton said:


> Might be a bit off topic, but I am definitely interested in learning how a coin flips outcome is dependent on the outcome of the last coin flip outcome. Every little bit of information I have ever collected tells me that coin flips outcomes are independent of each other.




The two events are only connected if they use the same coin. It's not quite 50/50, as one side of the coin may be slightly heavier, have different resistance values, or have been worn away. The effects are so insignificant that it's not worth thinking about. Adding skill is far more significant!



			
				overit said:
			
		

> Just to add my 2cents worth I believe the market is fairly random but has a bias built in.




Random from your perspective, but the market is made of people making trades, and each trade having a reason. These may be unknown to us, and therefore the market may _appear_ to be random, but it is never random.



			
				brty said:
			
		

> Does "variable" mean random??




The popular definition is that the outcome is unpredictable, so I assume that is what we're dealing with here, so no they wouldn't be the same. Variable shows probability, while unpredictable does not.



> By controlled, I mean by force applied in the coin tossing case, but everything else that is considered random also has 'force' of some type or description applied.




I believe you. It's no different than gaining an advantage in craps. A coinflip is only a "coinflip" if we assume both sides have equal characteristics, and that the flipper has no affect on the outcome, which of course we do. There will be a slight bias among anyone who flips a coin consistantly. The less spins and the more consistency, the greater the bias.



			
				brty said:
			
		

> Probability is simply accepting the fact that alternate events could occur, not the actual computation of why they did occur.




I agree, which is why I'm suggesting that the market is never random, despite it appearing that way to many.



			
				ThingyMajiggy said:
			
		

> Whats the big deal about if its random or not?




If we're defining random to mean unpredictable, then people who suggest it is random shouldn't be entering the market. The fact they are doing so suggests that they do not think it is unpredictable, and an inconsistency in logic.



			
				MichaelD said:
			
		

> My view is that any given chart looked at in isolation provides nil information as to what will happen next.




Actually, it follows probability. The only issue would be lack of data on the trader's part.



> If sufficient people look at the chart and believe it means something, therein lies the genesis of a potential non-random event (= potentially profitable event with appropriate trade management), but these are mere ripples in the sea of randomness.




And that genesis occured a long time ago. It isn't an issue these days, as enough people use charts and enough importance is placed on them. The charts are about probability, not randomness. Every trade on a market has reason behind it, and therefore the market cannot be random. It may be unpredictable to an individual, but that does not mean it is unpredictable.



			
				beamstas said:
			
		

> Tomorrow the market could be up or down, it's pretty close to a 50/50 chance.




Perhaps if we were provided with no other information.



> I'd argue that short term the market is less predictable than long term.




I have two views on this:

1. Longterm is less predictable since future sentiment and events are unknown, and we're far more likely to experience them over a 10 year period than in a single day.

2. Shorterm is less predictable, since the market focuses more on longterm movement.

I wouldn't mind hearing discussion about this, as I don't have any knowledge about it.


----------



## Frank D (18 August 2009)

tech/a said:


> Frank.
> 
> Your claiming to have a statistically reliable varifiable pattern?--AGAIN.
> Havent seen these stats!
> ...




I’m generally speaking, but you need to take my comment on 
‘*trend reliability’* and ‘*pattern reliability’ *into context.

A 5-day range for example is a 'reliable pattern' because is it calculated
 with math. Therefore the *pattern is reliable because it can’t change*, however it does change, it changes every day. 

Then it’s up to me to use a* 'reliable pattern'.*

Whether I optimize the trade to the 5-day range and the *‘reliable trend’*

That can be BUYing the 5-day 50% level in an UP trend, or shorting the 
5-day high, even if those levels fail on occassions.

For example today:- We have a lower Daily open and price hits the 5-day 50% level @ 4358 in a down trend.

Short the 5-day 50% level:- *reliable pattern.*

The market has moved down 21 points *reliable pattern.*

Now it’s up to me or any other trader to decide what to do with this 
reliable pattern.

1. Exit and take profits
2. Partial exit and hold 42-44 points:- *reliable pattern*
3. No exit but hold the trend down into the 5-day lows:- *reliable pattern.* in a down trend

What happens to the trader who decides to hold but the market now 
rises back above 4358 and takes out their stops.

That *reliable pattern *has failed, but it didn’t fail for the two 
other traders because of their own decisions. Trade management.

Therefore the 'pattern is reliable' but the outcome is random because of the decisions the trader has made:- entry, stops, and exit

A pattern has to exist before it becomes reliable, just like a coin needs
 to exist before you can toss it.

Just like a tight 5-day pattern below monthly highs can sell off at the start 
of the new week:- reliable pattern even if the outcome is random (DOW & S&P)

Monthly highs resistance:- reliable pattern, and a higher Weekly open and 
sell off from the 5-day 50% level:- *reliable pattern*

However, there is a lot of optimsation taking place because two independent components are being combined to skew the odds :- trends and patterns.

*Chart below is the 5-day range and 42 point bars :- reliable patterns.*


----------



## motorway (18 August 2009)

Large scale is more predictable than small scale
Day up or days down is wrong thing

This is small door to walk through

It does not matter that tomorrow may be 50/50 chance of up or down
each day may or may not be a 50/50 chance 

What matters is that if it is a down day is the probabilty  that it will make a larger move greater or smaller than if there is an Up day

50/50 wrong thing
walks and steps are wrong thing

markets JUMP 

and they Jump in larger JUMPS with trend than contra trend even though days up and down are 50/50

Large scale reverberates through time

long term dependence /memory

TIDES WAVES RIPPLES  & ~X

They have definite mathematical relationship
and at turning points resolve into and out of themselves

Markets are not RANDOM
question of looking at correct Scale

motorway


----------



## beamstas (18 August 2009)

Motorway;

Day to Day, i'd say that there is a 50/50 chance of the market being up or down.

Of course, like anything, Win% is never the end of the road.

I'd suggest that the average up move is larger than the average down move, 
Therefore over time, the market has a positive expectancy, or upward bias.

Regards
Brad


----------



## Mr J (18 August 2009)

Beamstas, a 5 year old could suggest there's an upwards bias in the market. Whether or not it averages 50% over the longterm is irrelevant, as a longterm trader doesn't care about daily movement, and those that do won't have any use for such a longterm stat. More important would be stats on whether the market closed high or lower the previous day, whether it's trending etc. It I imagine it can significantly different from 50% in many situation, enough so that someone who operates on the timeframe doesn't usually see the next day as a 50/50.



> I'd suggest that the average up move is larger than the average down move




If the market is 50/50 as you suggest, then this must also be the case. It's still irrelevant though - it's like suggesting that 50% of the time it rains, when perhaps half the year it rains non-stop and the other half is completely dry. Distribution is important.


----------



## MRC & Co (18 August 2009)

Thx for that last post Frank, exceptional.

Especially the part about what to do with the position once in profit, which really comes down to a good read of the market I think.


----------



## tech/a (18 August 2009)

MRC & Co said:


> Thx for that last post Frank, exceptional.
> 
> Especially the part about what to do with the position once in profit, which really comes down to a good read of the market I think.




Frank 
Its no more than a displaced average.
No more magical that a Bollinger band or any other envelope.
You project it forward simply by adding it to the high or the low.
Your not reading the market your simply anticipating like EVERYONE ELSE.



> Now it’s up to me or any other trader to decide what to do with this
> reliable pattern.
> 
> 1. Exit and take profits
> ...




*You have to be kidding!!*
I'll trade ANY method with the Three possible outcomes you suggest and have exactly the same result. This Duck may look dumb!


----------



## Cartman (18 August 2009)

tech/a said:


> Frank
> Its no more than a displaced average.
> No more magical that a Bollinger band or any other envelope.
> You project it forward simply by adding it to the high or the low.
> Your not reading the market your simply anticipating like EVERYONE ELSE.




who is *"everyone else"* in relation to Franks projections though --- there is the edge


----------



## tech/a (18 August 2009)

Cartman said:


> who is *"everyone else"* in relation to Franks projections though --- there is the edge




EVERYONE whether they trade with a Dart board,Elliott,tea leaves,taxi driver tips Funny mentals are ALL anticipating a positive result (If long).
Edge be Fooked.


----------



## Cartman (18 August 2009)

tech/a said:


> EVERYONE whether they trade with a Dart board,Elliott,tea leaves,taxi driver tips Funny mentals are ALL anticipating a positive result (If long).
> Edge be Fooked.




but the dart boarders, elliotters and taxi drivers aren't the ones "moving" the market Tech !!

the only "everyone elses" we are really interested in are the deep pockets who actually leave their stamp (ie non random) mark on the market ---


----------



## tech/a (18 August 2009)

> the only "everyone elses" we are really interested in are the deep pockets




Sorry did I mention an exclusion to deep pocket "Everyone elses" in my EVERYONE ELSE?

So lets be clear that that includes the instos who have whole floors of analysts all coming up with models which anticipate their next buy or sell.


----------



## weird (18 August 2009)

Agree with most comments that the real-time movement of the market is random, that stops and money management can skew and enhance returns, and that there are human behavior based price patterns that may further skew the results. And also there is the presence of 'trends' which can importantly be exploited.

However with the previous mentioned points, it begs to ask what is meant by 'reliability' as mentioned by Frank. 

One would hope to see a statistical evaluation of this through some sort of mechanical backtesting, with results in toe, to be evaluated and also reproduced by another.


----------



## Naked shorts (18 August 2009)

Gooner mentioned that the 1% compounded upwards is larger then 1% compounded downwards.

After some investigation, I have determined that this is the deciding factor for the system.

To test this, I simply changed this so it moves $1 each time.

I have attached the results below and it as it turns out, the average trade yields $0.


----------



## MRC & Co (19 August 2009)

Tech, are you assuming a bollinger band has the same success as Soros himself using his brain (a machine far better than any the human has created), to weigh up all known data, price action, psychology behind that, and make a decision?  And that an entry based on either your bollinger band or MACD, would be on par with his decision to enter?  The only difference in both trades being your ability to trend follow (yet he mainly picks tops and bottoms so that should give you an edge?) and money/trade management?

Now that is rubbish.

Let's face facts here, some people are just far better traders.  It's their entry, exit, scaling perhaps, and simply understanding how not to flow up (regardless of traditional money management).


----------



## mazzatelli (19 August 2009)

MRC & Co said:


> Let's face facts here, some people are just far better traders.  It's their entry, exit, scaling perhaps, and simply understanding how not to flow up (regardless of traditional money management).




"Edge" [mechanical or discretionary] would determine management of stops, size of bets etc, not the other way around IMO.


----------



## tech/a (19 August 2009)

MRC & Co said:


> Tech, are you assuming a bollinger band has the same success as Soros himself using his brain (a machine far better than any the human has created), to weigh up all known data, price action, psychology behind that, and make a decision?  And that an entry based on either your bollinger band or MACD, would be on par with his decision to enter?  The only difference in both trades being your ability to trend follow (yet he mainly picks tops and bottoms so that should give you an edge?) and money/trade management?
> 
> Now that is rubbish.




No. My mention of Bollinger bands is taken out of context.
Soros is an Everyone else on steriods (A market participant) he can actually manipulate a market to his benifit.He anticipates a positive result just the same as every other trader who takes a trade.He can get it wrong as well!



> Let's face facts here, some people are just far better traders.  It's their entry, exit, scaling perhaps, and simply understanding how not to flow up (regardless of traditional money management).




Yes there are 
Very good everyone elses.
Average everyone elses
Terrible everyone elses.


----------



## motorway (19 August 2009)

beamstas said:


> Motorway;
> 
> Day to Day, i'd say that there is a 50/50 chance of the market being up or down.
> 
> ...




Brad

http://www.clayallen.com/MD_NEWS_V8_I8.pdf


hence

_Statistical analysis of a
large number of stocks shows that while_--->

"The random walk model is used to
discredit technical analysis  it seems to be
totally misplaced. The trend following methods of
technical analysis seems to apply to most stocks,
most of the time. 

*The random walk appears to be a
strictly academic construct that does not fit with
reality *and it primarily applies to stocks with only
limited profit potential."


Also why most TA that would work very well with biased
random Walks wont work very well  with real markets
( manipulated JUMP market )
It can just follow behind ( sometimes well behind )


Also Why MRC&Co can say Soros works
and you can say entries don't matter 
and you can both be right as far as it goes...


motorway


----------



## Frank D (19 August 2009)

tech/a said:


> Its no more than a displaced average.
> No more magical that a Bollinger band or any other envelope.
> You project it forward simply by adding it to the high or the low.
> Your not reading the market your simply anticipating like EVERYONE ELSE.




Exactly, my point is you need to find a 'reliable pattern' that works 
and validate the pattern via trade ‘management’, but the outcome is 
random because the pattern is reliant on the ‘trend’: Pattern & trend

That’s why we optimize  ‘reliable patterns’ because of the trend in the 
market.

A reliable pattern is far more robust when used with a reliable
 ‘trend’ depending on the timeframe at the time. The larger the trend the greater the random
 ‘reward’ the pattern will provide.


A 20-day moving average on occasions will provide a perfect entry 
depending on the ‘trend’, on other accessions it won’t, but I’m not sure if a 
20 day M/A is a valid pattern unless it’s been tested.

Regarding *Bollinger bands or a 20 day M/A average*.  I personally 
haven’t tested them or formulated a strategy to use those patterns,*so
 for me they aren’t reliable and totally random and useless.*



tech/a said:


> *You have to be kidding!!*
> I'll trade ANY method with the Three possible outcomes you suggest and have exactly the same result.





Three possible outcomes is dependant on the individual trader and how long they hold their position ‘open’ and the width of their stop.

You can't have the same result even with the same pattern because each of the 3 traders can decide to 'enter & exit' when they choose.

Three different traders could trade the same pattern and ‘trend’ but have three different outcomes even if they have the same ‘entry’ and use the same pattern because of the decisions made thereafter.



tech/a said:


> *Charts are random.* ---Have no reliable reoccurring information for trading.




Tech/A

*You are one big contradiction.*

You swear by Elliot Wave, you post charts constantly about price 
projections.

You place snap shots of how much money you make on trades

You’re not trading by throwing darts. You must be using some ‘reliable pattern’ and ‘trends’ to make your trading decisions based on reoccuring information.

*That statement is going to haunt you everytime you post a chart or make an analysis.*

Patterns & Trends when combined can be managed because they are 'reliable', That's how most traders trade.

However, your personal outcome will be random regardless of trading a pattern and trend.

I believe the market isn’t random. There’s not much more to say on my part.

I believe the trader and the decisions made is 'random', not the market.




tech/a said:


> This Duck may look dumb!




I don’t know what you look like, but your contradication makes you look like a ‘goose’.


----------



## tech/a (19 August 2009)

Frank.

Once you *look back on the chain of posts *and see that I was attempting to make sence for those on the thread of statements made by another poster you will realise that the "Goose" label fits Frank far better than this duck.

Originally posted by Michael All I was doing was having a stab at what i thought Michael meant.
An apology anytime would be accepted.

*Read post #12*


----------



## Frank D (19 August 2009)

My apologies   

i'll wear the feathers.


----------



## Mr J (19 August 2009)

For those that think the market is random, please define random and why you think the market is random.


----------



## Naked shorts (19 August 2009)

mazzatelli said:


> "Edge" [mechanical or discretionary] would determine management of stops, size of bets etc, not the other way around IMO.




This statement is incorrect, if you know how to manage your stops this can be the defining edge of your trading system.


p.s. interesting conversation btw


----------



## Mr J (19 August 2009)

I think both statements are correct. Management affects edge, and edge affects management. If I practise scaling in, perhaps I can increase my edge. Perhaps I'll scale out because I feel my edge on that trade has become lesser.


----------



## tech/a (19 August 2009)

Naked shorts said:


> This statement is incorrect, if you know how to manage your stops this can be the defining edge of your trading system.
> 
> 
> p.s. interesting conversation btw




Vote #1 N/S agree.

Frank you can borrow my suit anyday.
Slightly used.


----------



## Cartman (19 August 2009)

tech/a said:


> Sorry did I mention an exclusion to deep pocket "Everyone elses" in my EVERYONE ELSE?
> 
> So lets be clear that that includes the instos who have whole floors of analysts all coming up with models which *anticipate* their next buy or sell.




i'm not actually arguing with u here as such Tech --- 

what i am bemused about is the notion that many punters have this pedantic perception that the market is a random piece of "pumpkin pie" --- Postulation without proof is a pain in the posterior --- and prone to peculiar projections which prohibit potential profits based on poor planning. Physical procrastination is a plight which permeates the traders potential payrate as he ponders at length the precarious permutations of such pain.   (what can i say -- i'm a poet :

ie i'm interested in any punter who actually "really" believes the market is totally random AND who actually "really" trades ---- never actually really met one of those 





tech/a said:


> Yes there are
> Very good everyone elses.
> Average everyone elses
> Terrible everyone elses.




indeed yes --- but the deep pockets "everyone elses" mentioned above HAVE to pull the trigger at some point, so the anticipation phase you allude to, actually becomes a *footprint* for us little guys to base our "random": assumptions on   

PS MrJ  your post 43 was good ---- those who missed it should read it


----------



## Timmy (19 August 2009)

Cartman said:


> ie i'm interested in any punter who actually "really" believes the market is totally random AND who actually "really" trades ---- never actually really met one of those




Agree.


----------



## tech/a (19 August 2009)

If I thought the market was truely random then I wouldnt trade it.
I'm not that lucky with random.
The rest ofcourse is personal interpretation in whatever form you choose to analyse.


----------



## Timmy (19 August 2009)

tech/a said:


> If I thought the market was truely random then I wouldnt trade it.




Yep - its anything but random.


----------



## mazzatelli (19 August 2009)

Naked shorts said:


> This statement is incorrect, if you know how to manage your stops this can be the defining edge of your trading system.




I did not say MM does not improve a system, but suggesting it should follow predictive edge, not lead it.


----------



## nunthewiser (19 August 2009)

> A five-year-old female parrot named Strawberry performed better than many human investors in a stock investment contest, organisers said on Friday.
> 
> The parrot from Papua New Guinea finished third in the six-week contest which ended on Wednesday, said Paxnet, an online stock market information provider.
> 
> ...



.

i figured this was the right thread for this


----------



## Mr J (19 August 2009)

> 190 trades over the six weeks




I would bet that most "investors" would be completely chewed up by commissions trying to attempt this. The contest is pretty ridiculous though, as 7 trades for parrot is a completely meaningless sample, and the 190 trades for each contest are little better.


----------



## nunthewiser (19 August 2009)

Mr J said:


> I would bet that most "investors" would be completely chewed up by commissions trying to attempt this. The contest is pretty ridiculous though, as 7 trades for parrot is a completely meaningless sample, and the 190 trades for each contest are little better.




Geeeez  no need to analyze the darn bird .just admit that a parrot is a better trader/investor than 60% of the human population


----------



## ThingyMajiggy (19 August 2009)

Haha  

Polly beat a cracker!


----------



## Archibald Head (19 August 2009)

Hey nun.....
                      This is the idea of a lifetime!!!!!!!

Buy a heap of parrots.  Publish the stats in a workbook fashion with examples of past trades.   Call it the "featherbed" system and sell them for $6000 per parrot.......


----------



## Wysiwyg (19 August 2009)

Someone say parrots? Can`t get the damn things to choof off.


----------



## weird (19 August 2009)

My thoughts, lower time frames than that an individual is trading, from that perspective, ticker movements could be considered random to that individuals perspective, whether they are or not, however the expected max range of movement (volatility) in a defined period is perhaps less random. This can be useful in setting stops, entries, profit targets etc.


----------



## brty (20 August 2009)

Nunthe,

If this is evidence of "random", then no wonder there is no such thing....



> The parrot, using its beak, made random choices from balls representing 30 blue chips including Samsung Electronics.




Were the balls identical?? Did they have some type of defining marks on them, to note the different companies?? Was the choice of those 30 made by the parrot in the first place??

Absolute meaningless garbage. 

brty


----------



## nunthewiser (20 August 2009)

hahahahahahahha

oh dear ................. as you were guys


----------



## Mr J (21 August 2009)

nunthewiser said:


> Geeeez  no need to analyze the darn bird .just admit that a parrot is a better trader/investor than 60% of the human population




Can't help it, particularly when the media regard this rubbish as some sort of evidence. Funny test though .


----------

