Price Action Patterns Do Not Mean the Market Isn't Random

[1a2b3cppp 10]

Take a look at this chart. I’ve labeled some of the technical patterns that you might identify:

 

 

You can see a double bottom as price tests support and then rallies up to a previous level of resistance.

 

You can see price bounce off that previous resistance and then continue upward, and then come down and retest that same level, bounce off as it flips to support, and then continue upward again.

 

You can see a period of consolidation after a new high where it just kind of chops around for a bit, then breaks through to the bottom, bounces off that new support level, goes back up and is currently forming a triple top at a new resistance level.

 

A trader armed with this knowledge who can identify these patterns should be able to make some money, right?

 

Well, I hate to tell you this, but this is just a random chart that was generated by 1,000 coin flips. Heads is +1, tails is -1. The only change I made was to move it over to the left a little bit so it didn’t start from zero, since no stock ever starts from zero.

 

 

You can try it yourself here. Obviously some of the results won’t look like stock charts, especially the ones that go negative, but run it a few times and you should get some good ones.

 

Are you being fooled by randomness?

 

I never became profitable until I started to treat the market as if it were random. In the future I will share my method (for free, unlike scammy "gurus" I do not charge people to learn how I trade). Most people do not like my methods because I regularly break the supposed basic rules of trading (adding to losers, being long and short at the same time, etc.), yet none of the people who tell me I'm doing it wrong have posted real time calls of their own, so... haters gonna hate.

 

I am unable to predict market direction. My thread on learning how to read the DOM is another attempt to learn how to predict direction, but so far I have been entirely unable to do so.

 

Until I am able to predict direction, I will continue to treat the market as if it is random.

 

I wanted to post this thread in light of the recent threads on market direction being random.

 

Please note that I am not saying the market cannot be predicted. I am just saying that I personally cannot predict it, and as a result I adapted my methods from trying to predict to treating the market as if it were random.

 

So in other words, some people may be able to predict market direction to trade successfully. If what you are doing is working for you, by all means keep on doing it.

Edited April 22, 2013 by 1a2b3cppp

[steve46 12]

and of course this is just my opinion. I am sure it will be ignored by those who find it puts them in an uncomfortable position....

 

This to me is the prototypical adolescent response to an obstacle....

 

A black/white comment....it will be (fill in the blank) until I find out differently....here's a news flash, the market doesn't care about your pronouncement.....

 

As with most things in life, its NOT black/white....markets cycle from random to non-random all the time, on every time frame...if a participant cannot discern when/whether a market is exhibiting random/non-random behavior...that just means they are amateurs and therefore the best they can hope for is purely random (or worse) results if they put money at risk...

 

Teaching people to do this I start with the obvious...every earnings season, we see "bellweather" companies report. In anticipation of these reports, markets exhibit non-random behavior....after the reports come out, again markets exhibit non-random behavior..this is true for specific economic reports as well (FOMC being the most obvious). a small child could see this....

 

Within the intraday session, futures market exhibit non-random behavior at specific times of the day.....these non-random behaviors are correlated with the open, with the close of cash and the close of the RTH session (to name a few)....again its very obvious, but it requires the ability to think critically to make use of it....and unfortunately most of you don't have it.....so you end up making silly statements about what the market is and isn't....that's pretty much the height of ignorance....

 

Good luck

[DbPhoenix 42]

So. A fourth thread on this. Perhaps those who are interested in this random-non-random debate should instead turn their attention to the subject of trading the market vs trading one's ego, which is after all the basis for all the hand-wringing.

[1a2b3cppp 10]

and of course this is just my opinion. I am sure it will be ignored by those who find it puts them in an uncomfortable position....

 

This to me is the prototypical adolescent response to an obstacle....

 

A black/white comment....it will be (fill in the blank) until I find out differently....here's a news flash, the market doesn't care about your pronouncement.....

 

As with most things in life, its NOT black/white....markets cycle from random to non-random all the time, on every time frame...if a participant cannot discern when/whether a market is exhibiting random/non-random behavior...that just means they are amateurs and therefore the best they can hope for is purely random (or worse) results if they put money at risk...

 

Teaching people to do this I start with the obvious...every earnings season, we see "bellweather" companies report. In anticipation of these reports, markets exhibit non-random behavior....after the reports come out, again markets exhibit non-random behavior..this is true for specific economic reports as well (FOMC being the most obvious). a small child could see this....

 

Within the intraday session, futures market exhibit non-random behavior at specific times of the day.....these non-random behaviors are correlated with the open, with the close of cash and the close of the RTH session (to name a few)....again its very obvious, but it requires the ability to think critically to make use of it....and unfortunately most of you don't have it.....so you end up making silly statements about what the market is and isn't....that's pretty much the height of ignorance....

 

Good luck

 

lol @ subtly condescending reply.

 

I did not say the markets are random, I just said that, despite years of studying indicators, making my own, reverse enginnering others, studying price action, patterns, etc. etc., I am unable to predict direction.

 

So as far as I am concerned, markets are random.

 

It was this change in how I looked at things that caused me to change the way I trade.

 

I'm all for having a discussion about how to predict the markets as long as we are talking specifics and not vague nonsense like "trade what you see" or "do what the price tells you to do" (typical fortune cookie nonsense spewed forth by "gurus" to try and seem wise), or after the fact charts that are perfectly annontated with trades that would not have been visible in real time (my favorite is when a scammy "guru" posts a chart and says he entered the trade on the first touch of the trendline while ignoring the fact that it was impossible to know there was a trendline there in real time). No offense to you, of course, but 100% of the people and methods I've followed who claimed to be able to predict price ended up being "gurus" who hid behind vagueness, never made real time calls, and never address all the losing trades their system produced. That is assuming they even gave clear enough rules to have a "system" in the first place.

 

I would very much like to be able to predict market movement, even if it's only during specific times or for specific times (such as short time frames that are only apparent from looking at the DOM). I assume that if the market can be predicted, it's not 100% of the time.

[1a2b3cppp 10]

So. A fourth thread on this. Perhaps those who are interested in this random-non-random debate should instead turn their attention to the subject of trading the market vs trading one's ego, which is after all the basis for all the hand-wringing.

 

Can you elaorate on "trading one's ego"?

 

I feel like I want to agree with you but I'm not quite sure I know what you mean.

[DbPhoenix 42]

Can you elaorate on "trading one's ego"?

 

Missing a multi-hundred point upswing in a trading range because you're "bearish".

 

"Trade what you see" is also an example if you include what you left out: "Not what you think."

 

As for "do what price tells you to do", it's nonsense if only you don't understand what it means.

 

It's unfortunate that you've been fucked over by gurus, software purchases, trading courses/DVDs/webinars/mentors/other gurus of one sort or another. But don't disparage how other people make a living simply because you don't understand it. The answers don't lie in trading forums. They lie in your own work. Same goes for everybody else.

 

And none of it has anything to do with prediction. That's a loser's game.

[1a2b3cppp 10]

Missing a multi-hundred point upswing in a trading range because you're "bearish".

 

"Trade what you see" is also an example if you include what you left out: "Not what you think."

 

That implies you have a trading method that works, though.

 

I have read a lot of stuff suggesting that the reason people fail is because they can't stick to their rules.

 

I have always been of the opinion that that is incorrect, because I think most people don't even have a winning system so it doesn't matter if they stick to their rules or not.

 

There are a lot of threads where people are like "I broke my rules today and it cost me!" But they don't address all the times when they didn't break their rules and they still lost money.

 

As for "do what price tells you to do", it's nonsense if only you don't understand what it means.

 

It's nonsense 100% of the time. If someone asks a specific question about a specific situation, the reply needs to be specific. But "gurus" will say "do what the price tells you to do" which doesn't actually help at all. Imagine if you asked your algebra teacher "what do I do in this specific situation?" and the teacher replied "do what the numbers tell you to do." It's just as silly of an answer in trading.

 

It's unfortunate that you've been fucked over by gurus, software purchases, trading courses/DVDs/webinars/mentors/other gurus of one sort or another.

 

I haven't, actually. I haven't paid for a single thing (other than a monthly SierraChart package). I just follow threads about many of the "gurus", and supposed teaching threads from self-appointed "gurus" and they all go exactly the same way. They never have live calls* (always some excuse), and they never have anything specific enough to be helpful to anyone. It's always semi-specific, enough to sound complex, but it's always just a bunch of vagueness. The "gurus" always have excuses ready, though, including:

 

- some excuse about how backtesting is flawed (when their system doesn't backtest profitably)

 

- some excuse about how people always want answers handed to them without putting in the work themselves (attempting to justify their vague fortune cookie advice)

 

- some excuse about why they don't post live calls

 

But don't disparage how other people make a living simply because you don't understand it. The answers don't lie in trading forums. They lie in your own work. Same goes for everybody else.

 

Not sure why you went there. I'm not disparaging anything. I specifically said that some people may be able to predict direction, and if what you're doing works, keep on doing it!

 

I just said that price is random to me, and that thinking about it as such changed the way I trade.

 

And none of it has anything to do with prediction. That's a loser's game.

 

Directional trading is prediction. If you don't think price is going up, why take a long position? Of course I know you can be wrong more often than you are right and still make money.

 

 

 

 

*I will admit that if you are scalping it may be too difficult to make live calls. But if you're holding positions for longer than a few minutes, including swing trading, live calls are easy; I do it all the time.

[DbPhoenix 42]

I can understand why you'd be upset over not getting your questions about the book answered at ET or here, but the ranting thing is not the best way to introduce yourself, particularly when you are insulting so many people, intentionally or otherwise.

 

I never stop being amazed at how sure beginners are about everything.

[SIUYA 11]

I never became profitable until I started to treat the market as if it were random. In the future I will share my method (for free, unlike scammy "gurus" I do not charge people to learn how I trade). Most people do not like my methods because I regularly break the supposed basic rules of trading (adding to losers, being long and short at the same time, etc.), yet none of the people who tell me I'm doing it wrong have posted real time calls of their own, so... haters gonna hate.

 

 

Hi 1a2b3cppp, a couple of questions...(these are rough quick and dirty please take them as such.....)

 

You make the distinction that so long as you cannot predict you will treat the market as random and adopt your methods to represent this.

No problems - what methods are you thinking of applying?

There are many who still beleive that random entries with good money management can still be profitable....i was wondering what additional methods you might adopt?

 

Also re randomly generated data - IMHO this is good for testing a fully automated system on. Period. The reason being that real market data is not randomly generated, and the whole random data debate, and random market walks and efficient market theory is a seperate debate. While these things are related, they are also red herrings in many debates.

 

No one can predict the future, so you are not alone in that....all we can do is anticipate what if scenarios and react - even if this means you treat the market walk as random and assume money management ideas, and other methods that over the long run make money - otherwise all you will be doing is proving yourself right and in which case you probably should give up now and invest in the indexes.

 

You talk about people having a trading method that works, and that they follow..... and that people fail not because they dont follow the rules but because their method is designed to fail.....well duh! I tried for years to get those square tyres on the car to work but to no avail......stupid me. Just like I cant live underwater- insanity for trying to make something that is proven not to work work through pure persistance has nothing to do with randomness.

regards gurus - this has also been done add infinitum and people dont really need to go much beyond understanding the basics of things to look out for and then making a value assesment as to weather a guru can help them or they are wasting hard earned cash because they have other issues like being undercapitalised etc......again - nothing to do with randomness.

Regards back testing and gurus - i assume that you can back test and show your models work, and that while there are inherent pros and cons in every system these are explainable and people can choose to accept or reject the consequences. Any system using discretion really cannot be reliably back tested, and at best an audited track record is the best one can hope for.....

 

So geting back to your original post....

 

"I just said that price is random to me, and that thinking about it as such changed the way I trade."

 

Maybe the responses to you were a little premature, or maybe the offer to reveal your profitable secrets at a future date have been heard before, i was wondering if you could expand on this in regards your method when you say "Directional trading is prediction. If you don't think price is going up, why take a long position? "

 

(I generally assume every position is directional even spread trading, except maybe pure arbitrage, )

 

thanks.

[Galacticus 10]

What is the definition of "random market" ? :crap:

[steve46 12]

Amazing....random?

 

Several earnings reports out, all good, housing expected to be positive by a tick or two and (as I have said now several times) look what happens overnight.....for people in the business this is called "stealing the trade".....prime entries starting at around 2:15am, again at around 4am....and of course for the retail trade (who are always late to the party) at the RTH open...where they carry the ball up to about 1570 give or take...

 

Random? Really folks I like to help, but at times you just have to laugh....on days like this I feel fortunate to be able to do this for a living...

 

You people go right ahead with the debate....

[kuokam 10]

I am unable to predict market direction. My thread on learning how to read the DOM is another attempt to learn how to predict direction, but so far I have been entirely unable to do so.

 

That thread is two weeks old. 2 great weeks. I doubt you've learnt all the ins and outs of DOM and T+S in 2 weeks, with but one reader reacting. What if the answers to some of your questions are in mastering that skill? There must be a reason you were attracted to them in the first place.

Also, have you thought that it might be you who are unable to grasp / make good use of anybody else's teachings?

[DbPhoenix 42]

Amazing....random?

 

Several earnings reports out, all good, housing expected to be positive by a tick or two and (as I have said now several times) look what happens overnight.....for people in the business this is called "stealing the trade".....prime entries starting at around 2:15am, again at around 4am....and of course for the retail trade (who are always late to the party) at the RTH open...where they carry the ball up to about 1570 give or take...

 

Random? Really folks I like to help, but at times you just have to laugh....on days like this I feel fortunate to be able to do this for a living...

 

You people go right ahead with the debate....

 

Gallows laughter, maybe. But I know what you mean. I read this story in '99, then again in '06. Anybody want to know how it ends?

 

1a says that "as far as [he's] concerned", markets are random. Nor can they be predicted. Given that he began trading at the very end of 2008 and that a few months later the market began the bull run that took it up 150%, he has not only been trading a highly directive market but also one that has been anything but random. In a bear market, the $70,000 drawdown he took (rescued by the market, not by his "method") would likely have killed him, if it had been real money.

 

1a began with the usual neophyte explorations and errors before finally determining that trading as if the market were random was the way to go. However, since the market was and continues to be anything but, he began with the wrong premise and thus learned the wrong lesson. This has been the way of beginners for centuries, hence Neill's comment that one should never confuse brains with a bull market.

 

I remember well the screams of 2000 and 2007. One hopes that 1a will cash in his chips and spend his time learning how markets work.

[duncanhoo 10]

1a2b3cppp.....there are plenty of "setups" that deliver a positive expectancy and they are not hard to find on forums. One in particular I just ran on 300 stocks going back to 1995 and 54% of the time it hit a 5% target before hitting a 5% stop (43,000 times). Bias in the data...sure - survivorship for one...Random? I don't think so...

 

Start with something like that (a very slight expectancy) then you have to apply your own knowledge, skill and discipline to make it really profitable. Either you have an innate talent to add the context to the setup to make money or you need to learn it. I did not have the innate talent....and had to learn it - through thousands of hours of work, pain and suffering.

[1a2b3cppp 10]

I can understand why you'd be upset over not getting your questions about the book answered at ET or here, but the ranting thing is not the best way to introduce yourself, particularly when you are insulting so many people, intentionally or otherwise.

 

Who was I insulting to?

 

I didn't say "no one can predict direction and anyone who claims otherwise is a liar!"

 

That would've been insulting.

 

Instead I said "I am unable to predict direction so I needed to change the way I trade."

 

I never stop being amazed at how sure beginners are about everything.

 

I'm certainly a beginner in the grand scheme of things. I've only been trading for around 5 years, but only profitable since 2010.

 

I know there are people who have been doing this for much longer than I have and I don't pretend to have their experience. I'm always interested in sharing ideas, though.

[arvo 10]

 

So as far as I am concerned, markets are random.

 

 

I would like to disagree. Consider this deifinition by Wikipedia:

Randomness means different things in various fields. Commonly, it means lack of pattern or predictability in events.

Or this by Free Dictionary:

ran·dom (rndm)

adj.

1. Having no specific pattern, purpose, or objective: random movements. See Synonyms at chance.

 

Does any of this sound like pertaining to trading? Totally unpredictable? Why call it trading then - call it gambling .

In real life, every move in the market does have a purpose by those who are behind it (the big liquidity providers taking a perpertual free ride more than anybody else), and if you look at the charts you'll see a number of patterns all over the place that is far from indefinite. All these patterns have a high have predictive value - the value of probabilities, and where a higher probability exists, we cannot say that it is ruled by complete randomness.

 

I think randomness as a misconseption or a misnomer was wrongly introduced into the trading debate by Mark Douglas in his Trading in the Zone classic - as a convenient escape of dealing with psychological pain associated to losses as a result of mistakes made in trade selection and trade management.

 

But if you leave your "luck" to just entry followed by presumed randomness and don't know how to manage trades based on market behaviour, this is a dangerous and costly approach, imho.

 

BR,

 

arvo

[1a2b3cppp 10]

I am unable to predict market direction. My thread on learning how to read the DOM is another attempt to learn how to predict direction, but so far I have been entirely unable to do so.

 

That thread is two weeks old. 2 great weeks. I doubt you've learnt all the ins and outs of DOM and T+S in 2 weeks, with but one reader reacting.

 

I think I may have phrased that wrong :o

 

The "so far I have been entirely unable to do so" meant predicting price direction in general, not that I had given up on the DOM thread after only two weeks. I'm wordy sometimes and I edit and reposition sentences and sometimes the end result doesn't come out the way I intended.

 

What if the answers to some of your questions are in mastering that skill? There must be a reason you were attracted to them in the first place.

 

Absolutely agree. I haven't given up on the DOM yet.

 

Also, have you thought that it might be you who are unable to grasp / make good use of anybody else's teachings?

 

In the beginning I had those thoughts. You know, cult mentality, "everyone gets this but me! I just have to study harder. I have to figure out the secrets behind the vague fortune cookie advice." But then you realize no, no one gets it. No one is profitable. Not even the "teachers." (this is referring to the vague threads and methods by some of the well-known internet trading "gurus")

 

I worked in education for a bit in the past and one of the things you learn is that not everyone's learning style is compatible with everyone's teaching style. So it's definitely possible. But I'm a good student, and I ask very good questions, and when they get answered with vagueness and doublespeak, I don't think it's me who is failing to understand the teachings; I think it's that there's really nothing there to be understood.

 

Specific questions always get specific answers. Always. No vagueness. No doublespeak. No laughing it off with a joke (distraction) or other silly frame control nonsense.

 

Someone once shared a story about going to a trading seminar and they were talking about following short term trends during the day and someone in the audience asked how they knew which way price was going to go or something like that, and the "guru" replied, "I don't need a weather man to tell me if it's going to be raining 5 minutes from now." :crap:

 

I'm sure everyone laughed at the obvious simplicity and logical nature of that answer.

 

But if you actually think about it, that's a BS answer that didn't tell you anything.

 

So is it possible it's just me who can't understand the wise "gurus"? Yeah, it's possible. But somehow I don't think that's where the problem lies.

 

And even if that is the case, and all these dudes actually are profitable traders who are just so wise they are unable to explain their method to anyone else (or just me), that still doesn't change my basic premise that price is random (to me), and until I figure out how to predict price direction, I will continue to trade the way I do.

[SunTrader 10]

 

It's nonsense 100% of the time. If someone asks a specific question about a specific situation, the reply needs to be specific.ugh, including:

....

You would think so.

 

Not my experience with "gurus"

 

You would think a simple question would get a simple answer.

 

Must be the types that were good in school with essay questions.

 

Saying a lot, meaning very little.

[1a2b3cppp 10]

I would like to disagree. Consider this deifinition by Wikipedia:

Randomness means different things in various fields. Commonly, it means lack of pattern or predictability in events.

Or this by Free Dictionary:

ran·dom (rndm)

adj.

1. Having no specific pattern, purpose, or objective: random movements. See Synonyms at chance.

 

Does any of this sound like pertaining to trading? Totally unpredictable? Why call it trading then - call it gambling .

In real life, every move in the market does have a purpose by those who are behind it (the big liquidity providers taking a perpertual free ride more than anybody else), and if you look at the charts you'll see a number of patterns all over the place that is far from indefinite. All these patterns have a high have predictive value - the value of probabilities, and where a higher probability exists, we cannot say that it is ruled by complete randomness.

 

I think randomness as a misconseption or a misnomer was wrongly introduced into the trading debate by Mark Douglas in his Trading in the Zone classic - as a convenient escape of dealing with psychological pain associated to losses as a result of mistakes made in trade selection and trade management.

 

But if you leave your "luck" to just entry followed by presumed randomness and don't know how to manage trades based on market behaviour, this is a dangerous and costly approach, imho.

 

BR,

 

arvo

 

I use "random" colloquially to mean unpredictable. But I suppose there are constraints. For example, stocks cannot go negative. A true random sequence can go negative.

 

I assume the market will go up and the market will go down. I don't know when it will do each one, however. I do like to watch for patterns just to see how they play out but they don't play a role in my trading. Maybe I'll learn something, though.

 

My trading depends heavily on money management, including adding to positions, hedging in the opposite direction, and sometimes collecting dividends (although I guess that's technically not money management).

[sdoma 10]

So in other words, some people may be able to predict market direction to trade successfully. If what you are doing is working for you, by all means keep on doing it.

 

A note about the coin flip generator you used. Remember, the results you are looking at are not truly random if they are generated by an algorithm. By its nature, it is mathematical and predictable.

 

The market has some qualities of randomness without being truly random. At times, it does have purpose. At other times, you are looking at random-like noise. Knowing which instance you are observing is probably the most important skill you can have as a trader.

[zdo 20]

"The scoreboard lies."

[Seeker 11]

I use "random" colloquially to mean unpredictable. But I suppose there are constraints. For example, stocks cannot go negative. A true random sequence can go negative.

 

I assume the market will go up and the market will go down. I don't know when it will do each one, however. I do like to watch for patterns just to see how they play out but they don't play a role in my trading. Maybe I'll learn something, though.

 

My trading depends heavily on money management, including adding to positions, hedging in the opposite direction, and sometimes collecting dividends (although I guess that's technically not money management).

 

 

Are you aware, that if something is a complete random walk, i.e. equally likely to go up 1 as go down 1, at all times, then it is IMPOSSIBLE to ever make money out of that in the long run? It's not about strategy in that case, my statement applies for all strategies. It simply cannot be done.

 

Therefore, to make the statement that it is random, in the sense above, is to say that nobody can ever make money in the long run at trading, and nobody ever has, except as a statistical outlier.

 

If you believe money can be made, or you can make it yourself, then implicitly you are saying there are times at which one thing is more likely than another and it can be recognised. That's not the same as predicting with certainty.

[jimbo235 10]

Hi

I was attracted to the title of this thread, and was looking forward to reading 1a's ideas on trading randomness.

However, I was quite surprised to see so many people take offence at this topic, and disect every little detail he said.

 

Carry on 1a. I'm still interested.

[sdoma 10]

Are you aware, that if something is a complete random walk, i.e. equally likely to go up 1 as go down 1, at all times, then it is IMPOSSIBLE to ever make money out of that in the long run? It's not about strategy in that case, my statement applies for all strategies. It simply cannot be done.

 

Not true. What would make you money in that scenario is your trade and money management. Cut your losers short and ride the winners.

[arvo 10]

Not true. What would make you money in that scenario is your trade and money management. Cut your losers short and ride the winners.

 

Your statement is a contradiction in terms. If markets were truly random, there would be nothing to ride, because there would be no directional probability to profit from, just messy haphazard moves. Meanwhile, you are saying the opposite - you are saying that trends have strong directional probability and can be profitable. How that correlates to randomness I can't see? I guess you wanted to say that if you make mistakes judging probability you can compensate for them through good trade and risk management to a certain point where the originally misjudged probabilities turn and at least manage your way out. And that's a smart thing, because you assume responsibility for your trading results and for your misjudgements of directional probabilities. Much better than to say that, oh well, markets are random, I'll just trade my edge, believe in it and make it one day. :missy:

 

BR

arvo