Random Walks & Onemind

[ducati916]

Ahh but, their methods are beyond science and are unexplainable parts of conciousness that can only be proved by demonstration, and i'll be damned if i am going to demonstrate something that took me 20 years of hard work to discover. But i will use the excuse that i am a forum elder here to answer questions, but only ones where i can quote the same cheesy money management and psychology lines that are in every trading book, blog, website, seminar ect ect..Nothing actually useful will be shared..

It would seem the previous thread was closed.

Therefore, and this is addressed to *Onemind*;

If I demonstrate the egregious thinking behind the *random walk theory* I shall demonstrate it in this manner, and for the following reasons.

The scientific method requires only one example to disprove a theory.
The theory is assumed to be valid if no proofs to the contrary can be demonstrated.

Therefore, if you post your acceptance of the previous statement, I shall provide 2 examples, specific, that disprove the *random walk theory*

If you don't accept the previous statement, then I shall not bother, as it will only lead to further circular argument, and currently I don't have the time.

That is not to say that you cannot challenge, dispute, question the examples, in fact I would expect you to. But it will keep the discussion focused over the short timeframe.

If, after contemplation you come to accept my two examples as disproving the *random walk theory* it will allow you to find not just the two examples I have given, but the hundreds of non-random events that happen everyday within the financial markets.

jog on
d998

 

[rub92me]

Onemind has probably left the building. But I would't mind to see your examples that disprove the random walk theory, accepting your definition of the scientific method.

 

[doctorj]

Onemind is on a holiday, but I'm sure many others would benefit from your examples duc.

 

[ducati916]

Actually, I received a PM from *onemind*, so I will post the examples after I have my breakfast!

jog on
d998

 

[tech/a]

Why not just talk one on one with Onemind?

Do we really need another thread on Random Walk Theory?
There are about 1 million of them littering cyberspace.

 

[ducati916]

From the now *banned* onemind

Anyway, I am interested in your evidence even though i cant respond.

So in the thread just write, "I have become aware that onemind has been banned and cannot reply to this thread so i will post my proof anyway."

I shall lead off with a specific example;

ETF"s are are basket of underlying stocks that are purchased and securitised, and then traded like a stock on the exchange.

An example; DIAMONDS [DIA] is the tracking ETF for the 30 Dow Jones Industrials. This ETF is rebalanced in real-time on a daily basis on the basis of how the constituent stocks are trading, thus an ETF is a derivative product.

The e-mini Futures contract, the YM, tracks also the cash market [or again the constituent stocks]

Thus in effect we have two derivative products tracking the DJI averages.

Everyday there are arbitrage opportunities available to book risk-free profits when prices trade away from relative fair value.

The calculation is;

Futures Fair Value = Index * [1 + Time * Rate] - Dividends

Let's say the Futures are selling at a discount then; Arb's will Buy Futures & Sell; either, all 30 constituent stocks, or the DIA ETF, or some combination thereof.

The result is a return to a relative fair value.

Thus prices within the indices are far from random, they are in point of fact very tightly controlled via arbitrage.

Usually at this point, the dissenting argument revolves around, ahhhhh, but the stocks that underlie are random....

Well no.

Stocks will track their earning power on a *central value* basis, with potentially very wide fluctuations above and below.

These fluctuations are investor/trader reactions to new information, and are partly factual, partly sentiment or psychology.

Market Psychology;
Is not defined as the usual nonsense, greed/fear, but rather the divisions within the professional community.

We have funds divided into;
*Value
Growth
*Momentum
*Arbitrage
*Bankruptcy
*LBO
*Other

All of these strategies have at their core an investment paradigm on how to approach the market. At any given point in time, one strategy may predominate in any given stock. The strategy that predominates will set the trend for that stock.

A trend implies a starting point, and a finishing point. In between, you have volatility, sometimes very high, sometimes low. Thus, if there exists a trend, there is no randomness.

Volatility rising is associated with trend change because you may well have one or more strategies fighting for control of the stock, based on their individual investing/trading paradigm.

However, over long periods, stocks track their earnings, thus non-random, assuming you interpret the information CORRECTLY.

Incorrect assimilation of information will also account for reversals in trend. That is, everyone expects earnings to be weak, and are thus short, earnings are strong, shorts cover.

Business cycles, credit cycles, interest rate cycles, etc are also by their nature non-random. Excesses build-up in the system, and eventually, those excesses must be purged.

The *Timing* can be difficult [very] but again, this is not randomness.

Randomness exists, and it is the future, but randomness creates not further randomness in the markets, but rather *inefficiencies* due to faulty understanding, logic, models, etc.

jog on
d998

 

[rub92me]

Why not just talk one on one with Onemind?

Do we really need another thread on Random Walk Theory?
There are about 1 million of them littering cyberspace.

Well, maybe more useful then a thread on Trading systems, no? There are about 64.5 million of those about as well according to Google

 

[Porky]

Business cycles, credit cycles, interest rate cycles, etc are also by their nature non-random.

They are random as far as people trying to predict them are concerned. Lets say that on the fundamental level there are very good reasons why such things occur, you cant conclude its not random because there is not an economist in the world that can predict the next recession accurately ect ect..

Your logic is that because there are reasons things happen the result isnt random but the reasons themselves are random and no one in the world can predict outcomes unless having super computational ability to track every fundamental variable accurately and no one on the planet can do that. Even the best economists in the world still debate what the fundamental reasons even are.

I dont know what onemind will say about this but your trading strategy, although profitable, does not prove the non randomness of the market..

 

[Sean K]

I dont know what onemind will say about this but your trading strategy....

I think I know what he might say.

 

[professor_frink]

I dont know what onemind will say about this

Love it!

 

[Porky]

.

 

[Kimosabi]

Well, I think this e-drama can be best summarized by the video below...

 

[ducati916]

They are random as far as people trying to predict them are concerned. Lets say that on the fundamental level there are very good reasons why such things occur, you cant conclude its not random because there is not an economist in the world that can predict the next recession accurately ect ect..

Your logic is that because there are reasons things happen the result isnt random but the reasons themselves are random and no one in the world can predict outcomes unless having super computational ability to track every fundamental variable accurately and no one on the planet can do that. Even the best economists in the world still debate what the fundamental reasons even are.

I dont know what onemind will say about this but your trading strategy, although profitable, does not prove the non randomness of the market..

Market prices are not random, as demonstrated via the example of arbitrage, viz. the scientific method, one proof of falsity, falsifies the theory.

The two remaining challenges therefore are to demonstrate that the economy and the market are not directly correlated and that in point of fact the data is predictable over longer timeframes. Then, it will be seen that market prices are driven by the previously mentioned factors [strategies + timeframes]

First have a look at these statistics;
http://www.crestmontresearch.com/pdfs/Stock Economy.pdf

Second, the *randomness* of the market is further dispelled via the surprising *regularity* of the following data;
http://www.crestmontresearch.com/pdfs/Stock Yo Yo.pdf

The confusion in relation to randomness has occured due to the fascination with very short time periods and trying to analyse the *noise*

Noise, may very well be random, it is also irrelevent.

jog on
d998

 

[pedrochemical]

The scientific method requires only one example to disprove a theory.
The theory is assumed to be valid if no proofs to the contrary can be demonstrated.


Wow,my mathematician father warned me that economists were worse than physicists with their profligate use of the term proof.
I see why now.
Whilst I agree with the first statement, the second worries me.

So I guess that god exists as I cannot fond a counter example to his existence.
Well that is settled then. Happy easter!


Do you guys really believe something to be true merely because there are no proofs to the contrary? This guy was joking right?

I know this is an old thread, but that is really scary stuff people....

 

[motorway]

Why The Random Walk Is Mostly Wrong, Most Of The Time

http://clayallen.com/MD_NEWS_V8_I8.pdf


( Statistically )

It can be demonstrated that the
random walk is mostly wrong, for most
stocks, most of the time. A simple review
of the statistics for a large number of
stocks makes this conclusion inescapable.

--------------------------------->

The random walk applies to the movements of no more than one
third of all stocks at any point in time. The other
two thirds of all stocks are trending, either up or
down, and that is true almost all the time.

The random walk model is used to
discredit technical analysis but that seems to be
totally misplaced. The trend following methods of
technical analysis seem 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.
W. Clay Allen CFA


“The trend is your
friend.”
Old Wall Street
aphorism

motorway

 

[pedrochemical]

Did I miss something?
Maybe the Random Walk theory is correct - maybe it is not.
But the notions of proof to which Ducati916 subscribes are just silly.


I have a question.
Does the proximity in time to the point at which a trend or pattern is observed have a correlation to its predictive power?
In other words, are, for example, double tops and wedges considered more reliable indicators in day trading than they are when used for trading over weekly or monthly timescales?

Should I start a new thread to ask this? I have a bunch more questions to bug you with.

By the way, anybody who calls himself Ducati916 has got to be a basically O.K. kind of a bloke if a little too much of a risk taker.

 

[motorway]

Did I miss something?
Maybe the Random Walk theory is correct - maybe it is not.
But the notions of proof to which Ducati916 subscribes are just silly.


I have a question.
Does the proximity in time to the point at which a trend or pattern is observed have a correlation to its predictive power?
In other words, are, for example, double tops and wedges considered more reliable indicators in day trading than they are when used for trading over weekly or monthly timescales?

Should I start a new thread to ask this? I have a bunch more questions to bug you with.

By the way, anybody who calls himself Ducati916 has got to be a basically O.K. kind of a bloke if a little too much of a risk taker.

There are trends at all magnitudes

But a number of the smaller magnitudes have more of a random appearance

( participation / populations of interest )

There is one trend that is primary and this is the trend of manipulation

This trend has the least appearance of randomness

And rules over all the others. ( smaller 100% )

Think of a series of coin tosses compared to a series of share fluctuations.
In any time interval there can be many or few tosses/fluctuations

So misunderstand the time element and the true trends are invisible or at least distorted

motorway

 

[pedrochemical]

trends adn shapes -scaling properties?

Disregarding randomness, and imagining that I subscribe to technical analysis as a predictive tool, are trends in the more recent shorter term more useful than trends discerned over longer periods?
What I mean is - although line charts exhibit scaling properties (monthly, weekly, daily and intraday charts are indistinguishable without their time and price marked on them) can the same be said of these entities we call trends and shapes.
So is a double top considered as valid if the peaks of the double top are months apart rather than minutes apart?
Is there a difference to the chartist?

 

[motorway]

Re: trends adn shapes -scaling properties?

Disregarding randomness, and imagining that I subscribe to technical analysis as a predictive tool, are trends in the more recent shorter term more useful than trends discerned over longer periods?
What I mean is - although line charts exhibit scaling properties (monthly, weekly, daily and intraday charts are indistinguishable without their time and price marked on them) can the same be said of these entities we call trends and shapes.
So is a double top considered as valid if the peaks of the double top are months apart rather than minutes apart?
Is there a difference to the chartist?

If the primary trend that matters is the trend of manipulation

The primary task becomes one of acting in harmony..

double tops / wedges , double bottoms are all just static snapshots
and are not what are really important

The changes in stock prices, day-to-day, are not the result of some physical or electrical system but are due to the actions of human beings in buying and selling stocks.

These changes may be due to many factors, some fundamental but also emotional and psychological factors as well. The analyst accepts the fact that he may not be able to determine precisely which factors are in control at any point in time - he does not predict the trend as much as he just follows it.

He follows the trend so he will know when it changes direction. Knowing when the trend changes direction is the next best thing to an accurate prediction of the trend.

The lore of Wall Street indicates that charting evolved as a means for outside investors to keep track of a stock that was being manipulated by an inside pool. It was very important for the outside investor to know when the manipulation was finished and the stock had started down. When the trend stopped, he knew the inside manipulation was over.

The opposite of Random is Manipulated

The factors of manipulation are multiple

But

To create order ( trend ) takes work...

It takes work done--Work done shows up in how a stock fluctuates. This how being different to how a Coin fluctuates ( It is this difference and when it happens that a chart must reveal )

Work done is Energy transferred

Energy transferred creates High and Low

And along the way many patterns
that might or might not predict anything at all..

Think of Weather Sytems as an example

High and Low create potential

The patterns that matter are generic and few

When a stock ( just like a pendulum ) fluctuates
Work is being done on or by .Energy is being transferred and High and Low are being created.

Another name for High and Low is before and after

motorway

 

[motorway]

In studying the movements of stocks, it is well to have in mind the old saying,
"Stocks must fluctuate."

MUST

Why ?

For the whole why of markets.

To transfer RISK and REWARD

There is nothing that is random about such transfer

It is why some end up with all the reward and others all the risk

Stocks fluctuate to create trends such that Tops and Bottoms form and transfer can be facilitated.


motorway