How I Trade As If Price Is Random

[marktheman 10]

So you are saying that there is no chance of the share falling to $3 and I am saying there is a 3% chance, let's have a show of hands

[zdo 20]

For those of you who are actually learning some things from this thread…

 

When you’re setting up your scenarios and building your constructs , slide them much more closely around 50 50 than 97 – 3, etc.

(97 – 3, etc may be illustrative – but it is also produces ‘unconscious’ delusions …)

 

Also, watch out for those posts that lay down rules and structures for this type of trading without defining the capitalization parameters containing their approach…

(ie generally - ‘fully’ capitalized can fully scale… less fully capitalized can only partially scale… … barely capitalized better not scale at all…etc.... )

...and to have a 'less than random ;)chance in real life, you need to go much beyond generally to very 'system specific'... cause you, yes YOU, have an "...unless..." coming to a future in you...

 

Have a great weekend all

[marktheman 10]

For those of you who are actually learning some things from this thread…

 

When you’re setting up your scenarios and building your constructs , slide them much more closely around 50 50 than 97 – 3, etc.

(97 – 3, etc may be illustrative – but it is also produces ‘unconscious’ delusions …)

 

 

 

I am merely saying that I calculate the probability that using his current method there is a 3% probability of him executing a purchase at around $3. There is a 97% chance that he will not be required to enter at this level. It does not mean he has a 97% chance of making a profit; but by using probability it is easy to calculate his chances of making various profits and various loses. This assumes that the price movement is random which is an excellent way to test trading strategy.

 

USLV has fallen by 50% three times in eighteen months, $62 to $31 to $15.5 to $7.75 and now stands a shade above $6. What's more likely next folks $3 or $9? In my view they are equal chance but am I glad I'm not playing this game of catching falling knives.

Edited June 22, 2013 by marktheman

[1a2b3cppp 10]

.....and there in lies why the concept of random markets is so poorly understood.

 

Can you explain the concept correctly then so we understand it better?

[1a2b3cppp 10]

If silver drops more than 33% I wonder what will happen to USLV, which is a 3x weighted version of silver. So theoretically if silver fell by 34% USLV would fall by 102% so there would have to be some sort of reverse split or something.

[1a2b3cppp 10]

Silver chart:

 

[marktheman 10]

I've just compared the last two years of USLV and SLV. It looks to me that when silver drops in value you not only get the full drop in silver but you get the drop magnified by the weighting. This is the devil's child in a bear market.

[MightyMouse 12]

SIlver and SLV can go nowhere and USLV will lose money. Read the prospectus

[1a2b3cppp 10]

Yeah I know. But I'm using 1/3 the capital that I would otherwise use.

 

Hopefully there will be some good movement.

[uriyanko 10]

Markets can be random or not - but the interesting question: Is it possible to make money without any prior knowledge - by a strategy. Say the next strategy - "buy cheap and sell high" - assuming that the price will rise above the "buy price" within a reasonable time.

[SIUYA 11]

Can you explain the concept correctly then so we understand it better?

 

1....if you think markets are random you should not be adopting an active trading approach.

The whole definition of random markets revolves around the idea that you cannot outperform a market if it is random - hence you may as well adopt a passive investment approach.

 

2...its also pointless even trying to apply statements like this is equally likely or 30% likely to occur. Markets dont work like that and its a fools job to apply numbers. Even if a pattern were to show something like a 50:50 chance of it resulting in some outcome, the best you can get is then a 50:50 chance of that occuring and then thats all....after that the game changes. Multiplying out probabilities is deluding yourself in this instance.

 

3...This is not like a game where by rules govern the odds. eg; roll a dice there is 1 in 6 chance of any one number coming up, and also over the long term this will hold true. None of this is applicable to a market.

 

Zdo is right - you need specific strategy rules if you want to call it a strategy, otherwise its all a guess, and too often thats all most of these type of strategies are. Nothing wrong with that as you can still turn reasonable guesses into good trades depending on what happens....trade management is important.

 

There is nothing wrong with applying what you are doing - and not using leverage and understanding the pros and cons is important, but I think those who think its a strategy that involves an awful lot of correct instrument selection, timing and other elements that then require a lot of luck afterwards......in other words, a lot of the risk reduction is in the discretionary selection of timing that you might think.

[marktheman 10]

1....if you think markets are random you should not be adopting an active trading approach.

The whole definition of random markets revolves around the idea that you cannot outperform a market if it is random - hence you may as well adopt a passive investment approach.

 

 

I am talking about the overall market not components which make up the market:

 

The market is merely a vehicle to drive money from one trader's pocket to another trader's pocket; equal winners and equal losers in a dollar value over the long term. It moves randomly because the value of the market on any particular day is fair value and has taken in available knowledge at that point in time; the next move is unknown as the factors relating to that move have not come into play. If you have an insider knowledge of a massive terrorist attack then yes you could sell the global market before that attack and make a lot of money but without that knowledge you have no idea what event will effect the market tomorrow. The facts that change the market are random and this is what makes the market move randomly.

 

When you see winners you are being tricked into thinking that they are all successful traders. Try an experiment on Excel by creating 1000 different traders' accounts, randomly issue buys and sells of the dji on every day for the last twenty years. You will find some of the traders will make amazing fortunes and others hopeless losses, just like in the real world.

 

If you compare a random market which is created artificially with the real market you will see that they behave in the same manner; tops and bottoms, undersold, oversold, booms, crashes everything is there in the artificial market, all the technical indicators will give their readings but they mean nothing. You cannot predict either.

 

So why invest in the stock market? Because over the long term markets outperform inflation and good profitable companies will provide healthy dividends. Individual stocks can be assessed on their fundamentals and profits can be made by careful selection. Individual components of the overall market may take longer to react to news and quick action can lead to profitable trades. Studying the fundamentals of a company may find that a share price is too cheap or too expensive. Studying fundamentals of an individual country may show their stock market is undervalued compared to another country.

 

In my opinion the global market moves randomly but many of the individual components that make the global market do not and by using fundamentals great profits can and are made.

 

Technical analysis - is futile, it is a con, it is deceptive. Sure it appears to work for some but only because of luck.

[marktheman 10]

1....if you think markets are random you should not be adopting an active trading approach.

The whole definition of random markets revolves around the idea that you cannot outperform a market if it is random - hence you may as well adopt a passive investment approach.

 

2...its also pointless even trying to apply statements like this is equally likely or 30% likely to occur. Markets dont work like that and its a fools job to apply numbers. Even if a pattern were to show something like a 50:50 chance of it resulting in some outcome, the best you can get is then a 50:50 chance of that occuring and then thats all....after that the game changes. Multiplying out probabilities is deluding yourself in this instance.

 

Can I just clear this one up.

 

My previous post was analyzing the guy's USLV buying strategy.

 

The probability was used to demonstrate how deep he may have to dig into his pockets should the share go against him. This is a commonsense approach I apply before committing to a trade as I too buy down and it is important to me to know the likelihood that I may have to invest more than I am comfortable with.

 

I was demonstrating that he had a 3% chance of needing to buy the share at $3 and following his method of doubling up the number of shares there was a real risk he would need to invest tens of 1000s of dollars.

 

I can see nothing wrong with what I was saying, in the context that I was saying it.

Edited June 24, 2013 by marktheman

[SIUYA 11]

I am talking about the overall market not components which make up the market:

 

The market is merely a vehicle to drive money from one trader's pocket to another trader's pocket; equal winners and equal losers in a dollar value over the long term. It moves randomly because the value of the market on any particular day is fair value and has taken in available knowledge at that point in time; the next move is unknown as the factors relating to that move have not come into play. If you have an insider knowledge of a massive terrorist attack then yes you could sell the global market before that attack and make a lot of money but without that knowledge you have no idea what event will effect the market tomorrow. The facts that change the market are random and this is what makes the market move randomly.

 

When you see winners you are being tricked into thinking that they are all successful traders. Try an experiment on Excel by creating 1000 different traders' accounts, randomly issue buys and sells of the dji on every day for the last twenty years. You will find some of the traders will make amazing fortunes and others hopeless losses, just like in the real world.

 

If you compare a random market which is created artificially with the real market you will see that they behave in the same manner; tops and bottoms, undersold, oversold, booms, crashes everything is there in the artificial market, all the technical indicators will give their readings but they mean nothing. You cannot predict either.

 

So why invest in the stock market? Because over the long term markets outperform inflation and good profitable companies will provide healthy dividends. Individual stocks can be assessed on their fundamentals and profits can be made by careful selection. Individual components of the overall market may take longer to react to news and quick action can lead to profitable trades. Studying the fundamentals of a company may find that a share price is too cheap or too expensive. Studying fundamentals of an individual country may show their stock market is undervalued compared to another country.

 

In my opinion the global market moves randomly but many of the individual components that make the global market do not and by using fundamentals great profits can and are made.

 

Technical analysis - is futile, it is a con, it is deceptive. Sure it appears to work for some but only because of luck.

 

Its the same thing.....if you think markets are random - then by definition you cant outperform them - regardless of it you think fundamental analysis OR technical analysis or both are a con or not....hence you should be a passive investor.

Even using your example many fundamental analysts dont outperform the market over the long term and is a reason why the markets are considered random. Its not just technical analysis that cant outperform.

Creating a system to outperform a random market is just an exercise in futility.

 

 

As for the strategy applied by 1a2b.... yes he needs a lot of dollars if something keeps going against him - he states he does not use leverage for this reason, but the point is still the same.....applying a lot of randomly guessed probabilities for what may or may not occur and for when they might is just guessing at best.

 

If a market is random - you have no way of knowing what percentages can be guessed at and if each tick is truly independent of each previous tick then if something is at $5 now then you cannot know what the percentage chance of it going to $3 is v it going to $50, or the probability of it going up 5% or 4.95% or 400% etc; etc;.....because in your example you are assuming too much.

Who is not the say the fair value of an object really is close to zero and even if it spends 20 years above zero it will ultimately end up going to zero, and what about the random effect of the actual movement itself each day, or time frame?

 

Which is why it is all guess work, and why many spend time trying to perfect other methods of making money assuming entering and exiting are random.....but even this then should be evened out over the long run. If you think the markets are random then you think its all down to luck for who makes money and who does not......no matter your system or how hard you work.

 

Plus for those who always like to pull out randomly generated markets and say - look these look like share prices therefore markets are random :doh: - well here is a news flash - the only way for this to even be considered at all valid is if every market participant made every trading decision in an equally random way and did not take into consideration their own past biases, the current news (the news may be random but the decisions based on them are clearly not) and future expectations as well as differing 'fair value' of a market. Markets dont work like that yet.

 

You can also do the same for landscapes High Altitude: Stock Market Trends as Realistic Mountain Ranges - information aesthetics

Or google Micheal Najjar

[marktheman 10]

 

 

As for the strategy applied by 1a2b.... yes he needs a lot of dollars if something keeps going against him - he states he does not use leverage for this reason, but the point is still the same.....applying a lot of randomly guessed probabilities for what may or may not occur and for when they might is just guessing at best.

 

If a market is random - you have no way of knowing what percentages can be guessed at and if each tick is truly independent of each previous tick then if something is at $5 now then you cannot know what the percentage chance of it going to $3 is v it going to $50, or the probability of it going up 5% or 4.95% or 400% etc; etc;.....because in your example you are assuming too much.

Who is not the say the fair value of an object really is close to zero and even if it spends 20 years above zero it will ultimately end up going to zero, and what about the random effect of the actual movement itself each day, or time frame?

 

Which is why it is all guess work, and why many spend time trying to perfect other methods of making money assuming entering and exiting are random.....but even this then should be evened out over the long run. If you think the markets are random then you think its all down to luck for who makes money and who does not......no matter your system or how hard you work.

 

 

Of course you can give a probability to a random event. The chance a head will fall is 50%, of two heads in a row 25% of three 12.5%. It is suicide to create a system and not know its implications, probability helps assess the risk.

 

You and I could put up a million dollars each and the person who rolls the highest of six dice wins the lot. One of us will win a random event and one of us will lose. The chance of winning is 50%. That is better odds than you'd ever get at a casino.

Edited June 24, 2013 by marktheman

[SIUYA 11]

Of course you can give a probability to a random event. The chance a head will fall is 50%, of two heads in a row 25% of three 12.5%. It is suicide to create a system and not know its implications, probability helps assess the risk.

 

You and I could put up a million dollars each and the person who rolls the highest of six dice wins the lot. One of us will win a random event and one of us will lose. The chance of winning is 50%. That is better odds than you'd ever get at a casino.

 

you miss understand me...and most people miss understand the probabilities assigned to a market v the probabilities you can assign to a event whereby you know the fixed rules of the game and possible outcomes with certainty....such as rolling a dice, dealing a card.

(Even if you could accurately measure the probabilities in a market with any certainty!)

 

In the markets you cannot tell this and to simply assume a 50/50 chance of a market moving up or down from any particular point is an error.

If you apply your example to the real world of the markets there are other parameters that you have to take into consideration to compare strategies.....probably one reason why a person can build a system that looses money, and yet when the system reverses its decision making processes from long to short it still causes losses.

 

If you take the very simplistic version of person A going long and person B going short then this is not trading or investing. Any one off transaction for any game theory, game of chance, trade or decision has very different outcomes than a series of trades..... and hence assigning probability maths to a series of events is very different.

[marktheman 10]

 

In the markets you cannot tell this and to simply assume a 50/50 chance of a market moving up or down from any particular point is an error.

 

If a market moves randomly it has an equal chance of moving up by the same percentage as moving down. A market that does not have an even chance of moving up than down is not random.You cannot predict a random market but you can assign probability to it.

 

Definition of random • Statistics governed by or involving equal chances for each item:

[SIUYA 11]

If a market moves randomly it has an equal chance of moving up by the same percentage as moving down. A market that does not have an even chance of moving up than down is not random.You cannot predict a random market but you can assign probability to it.

 

Definition of random • Statistics governed by or involving equal chances for each item:

 

glad you brought up definitions.....

 

....the are no rules of the market that mathematically state that the odds of a market move either way are equal - again - this is not like a game of chance where the outcomes are set

 

....momentum in financial markets is a perfect example of a phenomena that shows market moves are in fact not 50:50

 

.....Randomness of markets is not based on if you believe the market has an equal chance of moving one direction or the other - if you think a market is random market - again - you cannot outperform the market. Hence any strategy fundamental or technical by its definition will make no difference over the long run.

 

....randomness has different meanings in different fields.....your definition is not really applicable to markets because of points 1,2,3 and again your definition still simply reinforces your idea despite the evidence that each move in a market is completely independent of previous moves and has an equal chance of either direction.

 

......markets have a fundamental series of ranges within which they are likely to trade (particularly if you are a fundamentalist) and hence at the extremes of such moves the odds of a move in either direction are highly unlikely to be equal all the time.

 

......another error is people still think that the percentage moves EVEN IF GIVEN an equal chance of either direction is also equal.

eg; under your assumptions, a 50:50 chance of moving up or down by X% is the same as a 50:50 chance of moving by (X times 10%) (that would be nice!)

 

As 1a2b3...himself admits he views his ideas treat the markets moves as random (even if they might not be) and hence his methods....however he still applies other assumptions that refute his idea that the markets are random - he chooses which instrument to purchase and when to purchase.....that the instrument he has purchased is at some point over sold (a random market cannot be oversold without some measure of fair value (or in a dice example its long term average) and yet where is the analysis of a fair value?

 

In other words - randomness of the market is not the issue here and yet people continue to bring it up and try and assign percentages to it as thought ever market and everyone is under the same rules of the game.....and by its definition if you believe markets to be random you should be a passive investor.

[zdo 20]

Pls someone 'splain' to us

dependency

[caribbean 10]

Pardon my rant as I haven't read the whole thread, there's one fact you all seem to be missing, if the markets get to 0 we won't have any need for money, rather more cans of food, sacks of flour etc.

So risk is limited somewhat...lol

I always find out if something works or not (in the markets at least)by trying it out myself and so from that point of view I welcome 1A's approach, actually I have a sneaking suspicion I have met you in a private forum a few years ago but never mind, good to see you're happy with your method.

[elliot wave 10]

Ok, this behemoth thread has my attention now.

 

It'll take me about six months to get through it so I'll let you know what I think in the new year.