How Do You Know the Markets Aren't Random?

[SIUYA 11]

It seems Adrian you build in or try to build in ALL market conditions into a model, while Tradezilla and myself turn on different methods/models.

 

MM - punter...a great expression. Often not used in the USA but certainly used in Australia and the UK....it is a great expression for lots of different people....the punters at the racetrack, the casino, the stock market, the sporting event....

[Adrian 10]

@SIUYA Actually NO. I do not try to build in all market conditions. If you discover a bias, you discover a bias. End of story. It works in the type of market that it works in. It is up to you to make sure that it only operates in the environment where your bias works. So that is hardly making it work in all market conditions. You ust need to make sure it doesn't fire under conditions which are not favourable to it. The vast majority of models are only suited to a limited range of market environments. Only the very best can work in most market conditions.

[SIUYA 11]

Adrian.....seems like we are all on the same page. I was a little confused as was Tradezilla I think (his post #94)...plus I missed your post of "knowing when to switch it off"...sorry.

 

I read a good quote today in the FT Weekend edition magazine.....

 

"from an evolutionary perspective financial markets are neither efficient nor irrational - they are merely adaptive"

 

Says it all!

 

This was from a great article....I have a hard copy so I dont know it its live on the web, and you probably need a subscription to get it....in the paper "What makes a rouge trader?" and it discusses evolution, bird behaviour and trader behaviour.....a fantastic article if you can get it.

[MightyMouse 12]

I had a little free time to look up fresh performance data. The research I " boasted" of earlier is a bit dated but far more extensive, but the current numbers seem to be consistent with my previous findings and it is of little importance to me to reprove it to myself again.

 

I looked at a list of CTA's ranked by assets under management with a minimum of $1,000,000 UM. The largest fund has $895,000,000 under management. I would suggest that there is a certain bias to the data since most the larger CTA's have been around longer. I do not know why these CTAs were selected to be in this database other than that they seek to maximize their absolute return, so there may be some other selection bias that I am not aware of.

 

The data consists of 67 CTA's. The Average YTD is -2.33%, the max return is 58.42% and the min is -61.96%.

 

The average futures instrument is -.97% YTD.

 

What does this mean? It means that if on 1/1/2011 you had bought an equal amount of each of the futures contracts and held YTD you would have been better or by about 1.35% than you would have been if you entrusted your money with a professional trader or trading group who is supposed to know what they are doing. How often does this happen? They tend to underperformed the asset classes they trade all the time. The point is that they do not consistently outperform them as has been implied earlier in the thread.

 

What does this prove? Not a lot since it isn't a rigorous study of the performance of these CTA's or a rigorous study of all CTAs; but one would be inclined to think that a random list of CTAs that have been around for as long as 20 years and have better than $1,000,000 UM would on average be able to outperform the market performance YTD of the instruments they trade. It's all about the fees and it always was.

[BearBullTrading 10]

"What makes a rouge trader?" .....a fantastic article if you can get it.

 

Yep, interesting...

 

What makes a rogue trader? - FT.com

 

Cheers

[TRADEZILLA 10]

Looking at a 1hr candle chart that covers 120hrs of price movements is how most come to the 'random conclusion'..."Yeah it's random".

 

But, the chart action is just a trail, it's a track.

 

Do you make trails and tracks throughout your day? Of course you do. Is your day just aimlessly meaningless and random? You don't have to answer this.

 

Behind the apparently random daily tracks of everyone or anyone there lies a story, a job, a meaning. It all only becomes non-random once you know and see a little more than just the tracks on a map.

 

Are you referring to fundamentals?

[SIUYA 11]

What does this mean? It means that if on 1/1/2011 you had bought an equal amount of each of the futures contracts and held YTD you would have been better or by about 1.35% than you would have been if you entrusted your money with a professional trader or trading group who is supposed to know what they are doing. How often does this happen?

 

Picking this year is not very generous....what about 2008....?

 

Also if futures are a zero sum game....then if you track everyone who trades them, of course this will occur. They will naturally underperform as a group - after fees, both theirs and the brokers.

 

Point is we all know anything can be proven/disproved with such numbers/studies/averages.

Do your CTAs all trade the same bunch of futures, are their time frames long term or short term,when did you roll those futures - are they merely continuous contracts, has this particular time frame mainly been in contango or backwardation for this period....etc; etc;

So is the bench mark a fair one....

 

So while you would rip into someone for throwing up dubious examples.....and fair enough dont sell yourself short MM with a poor example yourself.

 

(I thin k this is an interesting topic in itself...maybe for a completely new thread....which i will start )

Edited December 4, 2011 by SIUYA

[MightyMouse 12]

Picking this year is not very generous....what about 2008....?

 

Also if futures are a zero sum game....then if you track everyone who trades them, of course this will occur. They will naturally underperform as a group - after fees, both theirs and the brokers.

 

Point is we all know anything can be proven/disproved with such numbers/studies/averages.

Do your CTAs all trade the same bunch of futures, are their time frames long term or short term,when did you roll those futures - are they merely continuous contracts, has this particular time frame mainly been in contango or backwardation for this period....etc; etc;

So is the bench mark a fair one....

 

So while you would rip into someone for throwing up dubious examples.....and fair enough dont sell yourself short MM with a poor example yourself.

 

(I thin k this is an interesting topic in itself...maybe for a completely new thread....which i will start )

 

I do not know what each trades. I do not know what their strategies are other than they all go for absolute return. Consider too that a factor that may impact the results negatively is that I have included no graveyard funds (funds that were there at the beginning of the year and blew up and are not on the list). I selected the YTD figures since it was the freest available and I assumed that the contango and backwardation would mostly cancel eachother out.,. I do not need to find this out this time and have no incentive to pay to receive data that is more extensive. I already know what the results are and I wanted to see if they are are consistent with what I learned last time and they are consistent. If I were to take all the industry data and dissect it more rigorously, I am 95%-98% sure the result will be the same.

 

I am not tracking everyone who trades the futures markets to get the zero sum results. These are not ALL participants in the futures markets and if they were then we would expect the negative sum game results. The are only a randomly selected list of 67 traders who presumably have good enough track records to attract at least $1 million of funds to them. The finding, with the positive and negative biases, is that on balance they cannot outperform the markets they trade which was the original comment made to adrian. The comment I "attacked" was that fund managers outperform the markets with lower volatility.

 

This is not to say that they are not good traders. I cannot show how much better than the average trader they did. The average trader may be down 20% in which case these guys are winners. So I am not comparing these guys to the average trader. I am comparing them to the markets they presumably trade.

 

Too bad for you. There are no black marlin in the UK waters. Are you leaving the yacht in AU?

[gianno 10]

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

 

The concept of randomness is not very well-defined or even understood by science even nowadays.

 

First define randomness mathematically,

[SIUYA 11]

Too bad for you. There are no black marlin in the UK waters. Are you leaving the yacht in AU?

 

As I have said before.....i dont own a yacht. I work on the advice if it floats, flys or f..ks....lease it dont buy it. (I do fall down on at least one of those )

 

If people really do want a discussion on this....it might be worth a place just to stick interesting related articles I have set up a thread.

 

http://www.traderslaboratory.com/forums/review-section/11420-can-funds-outperform-market.html

 

(personally if you did not think you could beat the market - what are we doing here! This is not to say that other measures cant be used - not just returns.)

[TheDude 10]

Anyone who states the markets are random is really stating that they do not understand the market, it's function, how it operates, and the very basics of markets. To state market prices are random is really, really foolish. It's verging on stupidity.

 

Like Taleb said: Random is a word we use to describe something we don't understand

 

I know academics like to have a model, and the random model may suit some purposes such as options pricing models. We need to remember that just because we use something as a model, we are really utilising that model as a substitute for fact.

 

If the markets were random, I'd be indifferent as to whether I paid 3 or 30. Guess what....

 

So, thats it. Prices are not random as I have proved. End of thread. May as well close it. I have spoken.

 

:applaud:

[zdo 20]

Dude, you sure took your dam time coming to finish it off

but thanks. You did a good job... well said

[TRADEZILLA 10]

The markets are a series of squeezes on liquidity at different levels/prices, that's about it. Probably easier to learn how to spot a squeeze than to guess the colour of the next spin.

 

The question is can it be recognize b4 it happens? If it can still be capitalized upon by seeing it real time as price is running, how much risk is involved in trading in that direction? One of the simple ways to recognize stop runs is to watch the speed of the tape. As the tape starts to run faster but the size is not picking up, its usually stop runs.. and you will often see new volume coming in as bigger size moves into the direction.

 

However, by the time you see this, you're about 2 pts late with another 2-3 pts profit potential left so the R/R is hsa often escaped..