Trading is HARD!

[ducati916]

matz,

No, my original point is regarding differences in decomposition of a stochastic trend [coin tosses] vs. deterministic trend [e.g. seasonal. momentum etc] from a stat/math perspective.

Either way you seem to be arguing that market prices somehow conform either to a mathematical process, or, a continued trend driven by the non-independence of the participants, unlike the independence of the coin toss. My argument is that for periods of time, these [seasonal, momentum, mathematical] models will work. Until they don't. This is due to randomness.

Yes, there are several definitions of random walk. There is no point using returns of independent and identical distributions, if testing predictability of returns with autocorrelations.

I would argue that using any form of statistical distribution in the market is asking for trouble that will eventually wander along.

jog on
duc

 

[mazzatelli]

Either way you seem to be arguing that market prices somehow conform either to a mathematical process, or, a continued trend driven by the non-independence of the participants, unlike the independence of the coin toss. My argument is that for periods of time, these [seasonal, momentum, mathematical] models will work. Until they don't. This is due to randomness.

For pedant reasons: random walk = stochastic process
Stochastic trends differ to deterministic - the latter is what most try separate from the noise to exploit.

Where did I argue this, other than make a distinction between stochastic and deterministic trends, and comment that most are trying to find the latter in Px [regardless of whether you believe it exists or not]?

As far as mathematical randomness, there is no question that defining it is a deep question. Whether that says anything about EMH or other market theories, is well, interesting...

 

[Wysiwyg]

Hard. Hard. Hard. Hard.

Who'd have thought that buying low and selling high could cause a heart attack?

You aren't alone. To buy a low you have to know it is a low and that aint gonna happen till after more trading periods have passed. To sell a high you have to know it is a high and that aint gonna happen until after more trading periods have passed. Both high and low being dependent on the periods observed ... 1 min., 1 day etc.

The trick is knowing when to sell for consistent profit and preferably maximum profit. To know when to sell is dependent upon multiple, maybe infinite variables that effect the price movement. Hard wired sell rules fail on that. Can't sense.

Know when to sell.

 

[young-gun]

Hard. Hard. Hard. Hard.

If trading was easy. easy. easy. easy,

Then trading wouldnt be profitable at all

 

[tothemax6]

And most of what I learn is that you can't actually trade profitably

Sorry mate, economics has been a stagnant swamp of quackery for quite some time. There is a long list of very wealthy men who have proved the random walk / efficient markets hypothesis completely wrong. Druckenmiller is my favourite example.

The idea that prices are random is so bizarre, it boggles the mind. Prices are the result of exchanges between men, indeed they are instantaneous ratios of exchange. These exchanges are made based on information and predictions (as a very basic example, I exchange $2 for a loaf of bread because I know I will be hungry, and based on the comparative value of going hungry vs using the $2 for something else). To say that it is impossible to predict future price movements based on information implies that all men are equal, and that all men have equal understanding of the world, and equal predictive abilities. Only under this situation (which is impossible) is it impossible to profit from price movements.
My favourite example of a 'winner' at processing information better than others, and profiting accordingly, is the Medallion fund.

One recent example being the Flash Crash of a couple of months ago.

I side with those who believe that is was caused by algo/hft trading. I also side with those who believe it was abruptly corrected by algo/hft trading, which rather than people back in 1987, automatically and instantaneously started buying based on fundamental value rather than standing back from fear.

Know when to sell.

Isn't that like telling a rugby player 'score more points?'.

 

[sinner]

The idea that prices are random is so bizarre, it boggles the mind.

Yes, very bizarre!

If the markets behavior were truly random, then it would be difficult if not impossible to create consistency. If it's impossible to be consistent, then we really don't have to take responsibility. The problem with this logic is that our direct experience of the markets tells us something different. The same behavior patterns present themselves over and over again. Even though the outcome of each individual pattern is random, the outcome of a series of patterns is consistent (statistically reliable). This is a paradox, but one that is easily resolved with a disciplined, organized, and consistent approach.

(Mark Douglas -- Trading in the Zone)

Here is a good thought experiment on the topic...



This is a graph of wind speeds I pulled off google images. You could even imagine the graph is part of a larger index representing broad weather conditions! You could just as easily imagine it was a chart of some mining stock or whatever if I changed the labels.

Prices aren't random, but the outcome of each individual participation in the market is! Maybe then the better description would be chaotic, or nonlinear.

From wiki http://en.wikipedia.org/wiki/Chaos_theory#Distinguishing_random_from_chaotic_data

It can be difficult to tell from data whether a physical or other observed process is random or chaotic, because in practice no time series consists of pure 'signal.' There will always be some form of corrupting noise, even if it is present as round-off or truncation error. Thus any real time series, even if mostly deterministic, will contain some randomness.

Most electronically traded markets these days come with inherent "corrupting noise" in the form of leveraged speculators who don't have to eat their losses thanks to taxpayer subsidy and government bailouts (got nothing against the leveraged specs who have to eat their losses like the rest of us). So markets are much more random these days than they were. Graph some long term Hurst exponents of the markets. iVAR(5) weekly/monthly is a good proxy if you can't calculate it.

 

[motorway]

Looks Random, Seems Random, So It Must Be Random?

The rational school of economists who postulated efficient markets assumed stock prices were random. Harry C. Roberts presented one of the earliest renderings of randomness in stocks in 1959. Of course the simplest way to prove randomness in stocks is to discredit anyone who postulates patterns in stocks.

The unlucky "patternists" in this case were the technical analysts ,Roberts's paper compared real stock prices with what we might call virtual stock prices. His virtual graphs were constructed of data obtained from a random number generator. The original graphs are reproduced in diagram 10-2. His assertion, or perhaps his assumption, is that because the real and the virtual stock chart have the "same visual appearance," stock prices are random.

" The graph seems to show a pattern, but in fact a pattern does not exist."

This may be a dubious logic.


After all, if you showed a physician an EKG graph generated from random numbers and he gave you a diagnosis, does it prove that the patterns in all the real EKG data are random or did you just put one over on the good doctor?

Could it be that the cognitive error is on the part of those who are culturally biased against patterns whether in technical analysis, chaos, or whatever.



The Challenge of Chartism

Price charts only tell us what we think they tell us. Our bias interferes with the potential for an objective perception of a given price history. We see only what we have been taught to see. One may say the same thing about fundamentals. Fundamentals are perceptual, too. The terrible news of the bankruptcy of WorldCom and generally failing communications companies were negative fundamentals for the telecom sector. Yet, some would say that these bankruptcies have finally created value in telecom shares, which had been overvalued for years. The return to realism and the reduction of expectations to reasonable growth may actually provide the best fundamentals in years. Who sees what? Those with a perpetually bullish bias are victims of the adage that beauty is in the eye of the buy-and-holder.

Woody Dorsey

If you showed a physician an EKG graph generated from random numbers and he gave you a diagnosis, does it prove that the patterns in all the real EKG data are random or did you just put one over on the good doctor?

So==>

If I give you a series of random numbers and tell you they are temperatures and ask you is it winter or summer... And you say summer ... Does that mean winter and summer do not really exist but are just random ?

Or

If I give you a series of random numbers and tell you they are a price series and you say they are showing a trend.... Does that mean that trends so not exist ?

Because The Generators of the numbers matters .

Motorway