I want to believe that it is not random, but this argues against me

[glyder]

I don't. I don't doubt it for a second. Informational edge is a huge huge advantage.

yes, but only the best inside information, which genuinely will have an impact.
market timing and other factors will still have their influence which could be negative.


Edit: but then a good trader, who can time the market and have the inside info, definitely

 

[Martinghoul]

i quite like this

...The failures of efficient market theories notwithstanding, the great problem for behavioural finance is its inability to offer useful predictions about the future direction of the stockmarket...

It's true, but only for now. Just like any other young science, behavioral finance/economics is mainly observation-driven at the moment. However, even now there are theories (such as Barberis, Shleifer etc) that, if reasonably correct, would allow one to forecast 'future direction of the mkt'.

As to the econophysics, I don't think this is a very useful comparison. Matter is composed of mindless atoms. Does that mean we're unable to formulate any physical laws?

 

[GammaJammer]

well you said an 'inside trader'. I never took that to mean someone who was absolutely mandated to trade on every piece of info they saw. Merely someone who wouldn't get thrown in jail if the did. Still theoretically free to cherry pick the trades. And under those circumstances I absolutely stand by what I said. That would eclipse all other edges, as well as not being mutually exclusive with any skill etc that the trader may already have.

 

[glyder]

well you said an 'inside trader'. I never took that to mean someone who was absolutely mandated to trade on every piece of info they saw. Merely someone who wouldn't get thrown in jail if the did. Still theoretically free to cherry pick the trades. And under those circumstances I absolutely stand by what I said. That would eclipse all other edges, as well as not being mutually exclusive with any skill etc that the trader may already have.

fair enuff guv 🙂
(I've a bit of a legal background, can't help thinking of inside info in the broad sense as everything that needs clearance to be announced etc....)

 

[poborsky]

Think Peter Lynch. Someone mentioned him earlier.

 

[pedro01]

I doubt that Peter Lynch would reveal the secrets of his success in any book.

I know - he didn't reveal the best settings for MACD & Stochastics in either of his books.

I emailed him about it but he didn't reply. *******. I think he uses moving averages 🙄

 

[poborsky]

He was asked to resign. (allegedly)

 

[GladiatorX]

Markets move based on the buyers and sellers who interact within that environment - Making it not random at all;
Don't assume things to be random just because you don't have the capacity to distinguish between the different components.

Even a seemingly 'random' event like the toss of a coin will have non-random variables that could make trends and the ability to guess a more likely outcome - For example the persons movement in flipping the coin, the weight, the wind, the persons technique...

An example;
If i place an item on ebay; Same a 32-inch Samsung television and i placed a starting price of ('Limit order') @ £500 (@ the ask) and then two people come on and 'ASKS' to buy (@ market/@ the offer) @ £500, then other @ £510 - They keep asking until the price is settled and the demand from one of the invididuals falls - I Sell @ The ask and the individual buys @ the ask for £575.40 ...
I could plot this on a graph.

This isn't random; This is fact. Its a fact of what happened in the supply and demand relationship, its a representation of the trades, offers and asks that occured...

It therefore isn't random, it represents fact. Just because you are unable to fully understand all the components that will influence the TRADES, OFFERS and ASKS, doesn't make it 'random'; Maybe unpredictable but market movements are FACT, trying to predict the future trades, offers and asks with 100% accuracy is knowing EXACTLY what will INFLUENCE the action of other trades... If we can percieve a situation where probability tells us that it is more likely more individuals will BUY (Create demand) than create supply we will have the ability to generate profits.

This is why for example fundamental analysis could be valid; If increasing earnings is positive, that will create demand and if your in a position will push prices higher. We can never know ALL the movements of all market participants however our job is to identify situations where we can assume a higher probability of DEMAND than SUPPLY for example... To do this with 100% Accuracy would be to know the exact fundamental influences that make individuals place a trade or not and ofcourse we aren't capable of this... We are unable to know this, that doesn't make it random; Just makes us lacking of knowledge -

Just because we do not understand something 100%, it does not mean it doesn't have a structure of reality and fact.

 

[elitejets]

Plus they can afford better toys.

Cos of all that taxpayer money and no one you want to lend to? 😉

 

[kateeus]

Markets move based on the buyers and sellers who interact within that environment - Making it not random at all;
Don't assume things to be random just because you don't have the capacity to distinguish between the different components.

Even a seemingly 'random' event like the toss of a coin will have non-random variables that could make trends and the ability to guess a more likely outcome - For example the persons movement in flipping the coin, the weight, the wind, the persons technique...

An example;
If i place an item on ebay; Same a 32-inch Samsung television and i placed a starting price of ('Limit order') @ £500 (@ the ask) and then two people come on and 'ASKS' to buy (@ market/@ the offer) @ £500, then other @ £510 - They keep asking until the price is settled and the demand from one of the invididuals falls - I Sell @ The ask and the individual buys @ the ask for £575.40 ...
I could plot this on a graph.

This isn't random; This is fact. Its a fact of what happened in the supply and demand relationship, its a representation of the trades, offers and asks that occured...

It therefore isn't random, it represents fact. Just because you are unable to fully understand all the components that will influence the TRADES, OFFERS and ASKS, doesn't make it 'random'; Maybe unpredictable but market movements are FACT, trying to predict the future trades, offers and asks with 100% accuracy is knowing EXACTLY what will INFLUENCE the action of other trades... If we can percieve a situation where probability tells us that it is more likely more individuals will BUY (Create demand) than create supply we will have the ability to generate profits.

This is why for example fundamental analysis could be valid; If increasing earnings is positive, that will create demand and if your in a position will push prices higher. We can never know ALL the movements of all market participants however our job is to identify situations where we can assume a higher probability of DEMAND than SUPPLY for example... To do this with 100% Accuracy would be to know the exact fundamental influences that make individuals place a trade or not and ofcourse we aren't capable of this... We are unable to know this, that doesn't make it random; Just makes us lacking of knowledge -

Just because we do not understand something 100%, it does not mean it doesn't have a structure of reality and fact.

This was a great post. Very down to earth. So markets may look random, but the movements that emerge there are made of non-random events. The only challenge is that there are so many of these events happening at any given time that it actually looks much like a random data generated by computer. So a double top forms in random series for a different reason than in the real markets. Hmm, currently I'm trying to mold my mindset more towards a conservative gambler, if that actually can even exist 😀 I wonder is it of any use to think what other retail traders are thinking about but instead concentrate on the fellows that actually move the market and try to think like they do? But then again is that possible?

 

[GladiatorX]

I wonder is it of any use to think what other retail traders are thinking about but instead concentrate on the fellows that actually move the market and try to think like they do? But then again is that possible?

Thats why i've always based my trades of order flow/Level 2 and time/sales - Its always made a bit more sense to me in predicting probabilities to read what others are FACTUALLY DOING or PLANNING to do.

Plus i've always said, the bigger the time-frame the harder it is to estimate the magnitude of a movement - IN otherwords its significantly easier to predict the probable movements during the next minute than week (IMO).

Two things i focus on; What are the 'big' fellows doing and what are there reasons (Can only know they're reasons so much) and in this i look at certain economic indicators and news, time and sales to see what they ACTUALLY have done and level 2 to give me an idea of real support and resistance levels.

Second thing i focus on; Incorporating human emotions into my methodology through thinking hard about my emotions, writing them down throughout the day, i can have a basis to work with of general human emotion and how this shapes the market...
For example; when the market is rising many individuals fear it will stop rising and this prevents them from entering, however after so much pain and 'missing' out they do eventually enter - This is why trends exist; Eventually however the most scared investor will finally buy the top of the market having waited so long....
If i work with this information based on my experiences and thoughts i can assume that in my trading i want to be very decisive and fast in my executions, if i'm going to enter trades i want to get in at the right time or not at all, furthermore i don't want to be buying after a significant rise...
Through placing these thoughts into my trading plan i can trade against emotions that cause market particpants as a majority to lose.

🙂 x
My trading methodology pretty much runs around the following few sentences;
- There is no point trying to predict trend changing direction, its better to wait until easier setups arise
- Trends exist - The earlier i enter, the better my rewards, the less my risk can be = However this means MORE losses, because i'm getting it with more uncertainty of the current direction (It hasn't proved itself yet) however this is preferable to chasing.
- My philosophy of the markets is this, incorporating my acceptance of the existance of trends; In a situation where 50/50 probabilities exist, i will enter with the current trend - If the trend continues i will take 2 points; If the trend ends i will lose 1 point.

Simple 🙂

 

[arabianights]

The idea behind random markets is that over the long term those events that drive the markets are pretty much random. I agree with this analysis. That doesn't mean that markets follow brownian motion; I think believing this is at the very least a misunderstanding of the central limit theorem.

 

[kateeus]

Thats why i've always based my trades of order flow/Level 2 and time/sales - Its always made a bit more sense to me in predicting probabilities to read what others are FACTUALLY DOING or PLANNING to do.

Plus i've always said, the bigger the time-frame the harder it is to estimate the magnitude of a movement - IN otherwords its significantly easier to predict the probable movements during the next minute than week (IMO).

Two things i focus on; What are the 'big' fellows doing and what are there reasons (Can only know they're reasons so much) and in this i look at certain economic indicators and news, time and sales to see what they ACTUALLY have done and level 2 to give me an idea of real support and resistance levels.

Second thing i focus on; Incorporating human emotions into my methodology through thinking hard about my emotions, writing them down throughout the day, i can have a basis to work with of general human emotion and how this shapes the market...
For example; when the market is rising many individuals fear it will stop rising and this prevents them from entering, however after so much pain and 'missing' out they do eventually enter - This is why trends exist; Eventually however the most scared investor will finally buy the top of the market having waited so long....
If i work with this information based on my experiences and thoughts i can assume that in my trading i want to be very decisive and fast in my executions, if i'm going to enter trades i want to get in at the right time or not at all, furthermore i don't want to be buying after a significant rise...
Through placing these thoughts into my trading plan i can trade against emotions that cause market particpants as a majority to lose.

🙂 x
My trading methodology pretty much runs around the following few sentences;
- There is no point trying to predict trend changing direction, its better to wait until easier setups arise
- Trends exist - The earlier i enter, the better my rewards, the less my risk can be = However this means MORE losses, because i'm getting it with more uncertainty of the current direction (It hasn't proved itself yet) however this is preferable to chasing.
- My philosophy of the markets is this, incorporating my acceptance of the existance of trends; In a situation where 50/50 probabilities exist, i will enter with the current trend - If the trend continues i will take 2 points; If the trend ends i will lose 1 point.

Simple 🙂

I notice that your thoughts are actually very close to mine. This post imho contains a lot of really practical information. I agree that studying emotions during the trading day can help in refining ones entries and exits. I have some basic knowledge about level 2, but after reading your post I'll probably spend some more time with it. I will re-read what you said a few times. I like to read and digest something that has simple logic in practicality in it.

Thanks again.

 

[GammaJammer]

The idea behind random markets is that over the long term those events that drive the markets are pretty much random. I agree with this analysis. That doesn't mean that markets follow brownian motion; I think believing this is at the very least a misunderstanding of the central limit theorem.

Oh crap. Coming dangerously close to being in agreement with arabian. Can't have that now.

Errrr.

You're gay?

 

[Technically Fundamental]

The idea behind random markets is that over the long term those events that drive the markets are pretty much random. I agree with this analysis. That doesn't mean that markets follow brownian motion; I think believing this is at the very least a misunderstanding of the central limit theorem.

What if it's cyclical? Say major event x happens and is acted upon in a big way which drives the market in a new direction towards a new and inexorable zero dimension of which market participants are completely unaware. Then as if by magic a series of seemingly random macroeconomic and commercial factors point to event y. Rinse and repeat....
😕
I was going to say could this not be graphically represented in 3d in a brownian fashion but then I thought that it would be far too complex to feed in all of the data. Unless you were to use only the data/markets that you believe are the major driving forces behind market activity thus cutting out most of the noise. I'll stop waffling now.

 

[gooseman]

you been at that hash again sonny?

 

[Technically Fundamental]

I don't smoke illegal narcotics. Give me lovely ciggies anyday.

 

[arabianights]

I don't smoke drugs. Give me lovely ciggies anyday.

Why, do you eat the ciggies?

 

[gooseman]

fags

 

[subarashi]

Below you see two graphs. First EURUSD weekly about two decades data. The second graph is done by me with excels random function. It consists of about 5000 points of data. IMHO you can see nice trendline/support/resistance bounces and breaks, double tops, bottoms hs, psych number action etc... I didn't bother to add any indicators there, but the results would probably not have been too surprising. Also surprise, surprise you can see clear up and down trends in both of the graphs. Even though the latter one is done basically by coin-flips.

EURUSD:

Random:

I really would love to believe that markets are not completely random, but this really strongly suggests the opposite. This comes to the point that entry matters not one bit because in the end the probability is always 50/50 or actually a little worse thanks to the spread/commission on a 1/1 R trade. ATM what I am really starting to believe is that all the TA/FA is utterly useless and in the end this business is really comparable to gambling, odds vice.

I argue that in the end all TA/FA is just trying to predict a chance which of course is not possible and will not end nicely in the long run. For example if you enter a trade with 50 pip stop and target, odds are slightly against you thanks to broker expenses. If trade goes your way 50 pips and you move your stop to BE now it is little more likely to close at BE. I can see no way that profits could be consistently generated with these odds. I've had my runs and ruins and now I see that the runs might just well have been because I had luck.

I'm really interested in hearing how people manage their trades and can they justify that there is a larger probability for positive outcome A to happen over negative outcome B on their trade management. In the long run I simply can't see it is possible to be turning in a profit thanks to the randomness of the markets. In my darkest thoughts I actually think that this whole financial crisis we are currently in was caused just a by a chance. Perhaps I'm just crazy, but if not... I just read Van Tharps TYWTFF praised by many. And in the end was disappointed as it really didn't offer anything new and surprising as I had expected. Areas of R multiples, expectancies, entries, trade managements were discussed in it, but in the end none of them IMHO can beat the randomness found in the markets because in the end it boils down to the point that no matter when you enter the market you always have the odds slightly against you on a 1/1 R trade.

Please prove wrong about the points I've made and justify if you see it fit why the markets are not random no matter what the timeframe. Oh and about timeframes. When you look at a 1min TF and then 1M TF what differences can you see on them? I'm asking this because I mostly see people praising their superiority. To be honest I see no differences in them, but I might be blind 🙂

I'm looking forward to have civilized, intelligent and knowledgeable comments from experienced people. Please don't come flaming here and accusing me of heresy. I'm not bitter or angry or anything like that: I just would like to discuss this subject that is not IMHO discussed all that much.

Thanks all.

Randomness is one of the most difficult problems to understand. Until Mandlebrot pointed mathematicians in the right direction it was fudged out of the way or ignored completely by most.

If you are of the "Markets are Random" school of thought read A Random Walk Down Wallstreet by Burton Malkiel or A Mathematician Plays the Market by John Allen Paulos. These authors give no real hope to active traders. For a different perspective Fooled by Randomness by Nassim N. Taleb gives an excellent read and holds out some promise that things are not so black as made out by Malkiel and Paulos.

People talk of beating the market but in reality this is not possible. Imagine a golfer trying to beat golf! We are not in competition with the market but other players, traders.

This means that psychology must play a role in how prices move to reflect the value placed upon them by participants. Since we are not using 100% algothimic methods which trade without intervention the problem becomes one of understanding human behaviour and profiting from that understanding. John Maynard Keynes said trading was like:

...those newspaper competitions in which the competitors have to pick out the 6 prettiest faces from 100 photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole.

Not picking the equities you think are best but those you think most likely everyone else will pick! Keynes and the Market is an entertaining book by Justyn Walsh that documents Keynes's fortunes as a trader.