Profiting from randomness: A money management system?

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'.

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--

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.

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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.

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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.

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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.

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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??

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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.

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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.

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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?

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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.

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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.

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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.

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Perhaps if we were provided with no other information.

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

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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.

tech/a said:

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--

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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.

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

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

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

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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.

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.

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.

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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
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.

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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!

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.

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

Cartman said:

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

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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.

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.

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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 ---

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

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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.

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.

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.

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).

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).

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

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.

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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).

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

beamstas said:

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

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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

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.

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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.

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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.

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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!

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