How Do You Know the Markets Aren't Random?

[SIUYA 11]

Damngernmouse - in answer to your question, my answer is in my post....

 

"I assume they are not random (as I dont believe that each and every subsequent price point is independent from those that have preceded it. So it is not a casino)"....its an assumption, not an opinion. I leave those to the brokers

 

Even with studies showing that markets are random and you cannot outperform an index (or what ever benchmark you desire) a lot of this is seems to be measured from a long only, all invested no discretion attached point of view.....one of the issues with all back testing. There is also a difference in many of these studies between trading and investing.

I also think that there is a separate question of --- Is the market price action random, or do managers/traders returns reverse to the mean ...which may be the benchmark to whatever index they have tied themselves to, and hence it is often thought that markets are therefor random and cannot be outperformed.

 

 

 

Of course I am comparing apples to oranges. Hedge funds aren't replicating the S&P500 index. Hedge Funds trade all sorts of things. People invest in them as a diversification away from long equity only investments. And in some cases people invest in them exclusively because of their tight risk controls (in the better managed ones anyway) and their return/risk characteristics. So your completely wrong to say I need to compare hedge funds that only trade the S&P. Our goal is to establish if markets are random or not and can hedge fund mangers out perform our main investment vehicle of long equities.

 

if you are bench marking to the S&P and using this as a measure to compare hedgefunds then you will get pretty poor information for those funds that do trade other instruments. In which case you could be proven wrong. For many periods certain hedge funds massively under performed the S&P.....mainly as they traded other instruments, styles or strategies.

To be fair you do need to compare apples with apples etc otherwise you can get distorted information. Not everyone who invests in hedgefunds does so to hedge their "main investment vehicle of long equities."

[Adrian 10]

@danger It is quite amusing hoqw quickly threads go off topic. I've seen it a million times, so It is of no surprise to me. I tried to keep it on topic but people are simply incapable of doing this for various reasons, largely due to their personal flaws. I respect those who can keep it on topic, and have little respect for those that can't.

 

I can't speak for other, but it has nothing to do with persona thought processes that determine if markets are random or not. The mathematical proof is either there or it isn't. I cannot quote you major sources simply because I do not keep copies of research reports, or store a web page etc for something that I learnt to be true a long time ago. To anyone who has studied the markets for years and actually traded them, it is also obvious they are not random, and not random by a long way. I made one reference to Edgar Peters book. Do a Google search for Momentum studies. These are the most common in showing how easy it is to outperform the market over time. Do a search on the correlation of daily highs and lows and when they occur. I;ve mentioned all this in prior posts. Why do people keep asking? Can they not read? Can they not do their own research into finding the information required? Not starting from scratch, but I simply mean reading research of others. Much of it gets publish by stockbrokers or hedge fund managers, and occasionally by academics. There must be hundreds of papers out there showing that the markets are not random.

 

If it is not 'obvious' to you that the markets are not random, then I say to you that you have not spent enough time studying them. Once you have, it will be 'obivous',

 

Opinions are a dime a dozen and count for little UNLESS they are based on solid research and facts.

[Adrian 10]

@SIUYA I generally agree with what you say. The thing is there are almost an infinite number os ways of looking at perofrmance comparison. That is NOT the purpose of this thread. I have merely been trying to give very simple and obvious examples of real world situiations where it is shown conclusively that the markets are not random. Problem is people want to argue and fight and try and prove me wrong. Perhaps they are academics who can'rt handle reality of the real world. I do not know. Nor do I really care. I know with 99.9% certainty of what I am talking about because it is based on 30 years of observation, reading, personal study and research and testing.

 

I suggest people who are still undecidfed if markets are random or not, to start working harder and create a simple trading model that worked in the past, then do a walk forward test and see if it works in the future. A trading model that is well designed, and NOT curve fitted (as distinct from optimised) will perform similarly into the futre as it did in the past (assuming similar market conditions). The more it underperforms the more you have curve fitted your model. It is basically as simple as that.

 

Here's another though that just came to mind of a report I read recently. Sell in May and go away. I'm sure you have all heard of that before. Are you aware that virtually all of the S&P500 returns over the past 100 years has come in the Nov-May period. Not most of, but virtually ALL the returns. That is truly an astonishing and powerful piece of information. If the markets were random, surely the money returns would all be roughly similar over the long run? Let's see how long it takes for someone to attack this piece of fact as well LOL.

[MightyMouse 12]

@MM You seem to be trying to pretend to talk high level, but all your comments are contradictory, wrong, and simply confusing and distorting for other readers of this thread. The comments add nothing, and just ceate confusion. You need to gather your thoughts and express yourself more clearly, as your interpreations of what I write are just amazingly bad an erroneous.

 

Of course I am comparing apples to oranges. Hedge funds aren't replicating the S&P500 index. Hedge Funds trade all sorts of things. People invest in them as a diversification away from long equity only investments. And in some cases people invest in them exclusively because of their tight risk controls (in the better managed ones anyway) and their return/risk characteristics. So your completely wrong to say I need to compare hedge funds that only trade the S&P. Our goal is to establish if markets are random or not and can hedge fund mangers out perform our main investment vehicle of long equities. Clearly they do. End of story. Only a fool looking to create an argument would suggest otherwise. Of course you can also do as you suggest and just look at those hedge funds tha tonly trade equities. That would not be a flawed approach bby any means.

 

Then you go on to state that if ALL hedge funds outperformed with lower volatility I would have something LOL. Are you kidding? I'm sure I am misinterpretating your statement as only an idiot would ever expect every hedge fund to outperform on a risk adjusted basis. And if you bothered to read my commentary properly you will se eI made mention of survivorship bias. Why I waste my time replying to these comments from people who pretend to know what they are saying, but clearly don't is beyond me. You know it is not a bad thing to adm it ignorance on something. A person will gain a great deal more respect than someone who pretends to know. In fact the latter type, get zero respect from me.

 

And lastly, you quote a passge from the URL article I gave.. Why did you quote it? I am sure you are trying to prove you are right and I am wrong LOL. If you believe that showing hedge funds underpeformed in a massive equity bull market proves that hedge funds cannot outperform and therefore markets are random, you truly are an insecure fool, desparate for attention to cover up your own poor trading record. When a market, any market, goes into a massive bull trend, then is no strategy (assuming no leverage) that can outperform a buy and hold for the length of the bull trend. These are generally rare events though, that by definition do not last. It is hilariously fascinating that you put the quote in but never commented on it.

 

Backk to you MM. Pelase write a new reply that shows you don't understand what you are saying. Amuse the followers of this thread. SIUYA will be laughing as well, as you attempt to look for every excuse under the sun to prove that the factual research out there is all wrong and you are the only one who is right. LOL secretly though, we both know you agree with what I right, and that markets aren't random, and that enables the better investment managers (whatever their specialist area) to regularly generate excellent risk adjust returns. If you don't believe in this, put your money in a range of funds that have underperformed for at least 5 years, and share with us which ones you chose, as you wil now tell us that these funds should return towards a mean return of zero. Of course even if markets were random, that logic would be wrong as well, as the law of large numbers takes hold. But that is another disscusiion altogether that has no relevance here.

 

Your brain is drawing faulty conclusions to my post.

 

You seem to have bought into a fairy tale that hedge funds outperform and are staunchly opposed to anything that threatens your fantasy. You use it as a basis to support the idea that markets are not random. I was offering clarity to the thread that such a statement is simply not true if you compare apples to apples. If you would like to cite hedge fund industry research about hedge funds, then you should be suspect with the findings of the research before you call it factual.

 

If you would like to laugh at my post, then laugh at this: hedge funds do not outperform the markets they trade when you take all hedge funds who trade a particular market into consideration. The number of managers who do outperform the benchmark indexes are approximately equal to the number of mangers that you can predict would outperform the benchmark indexes, given the universe of hedge fund managers who are included in the data.

[horace 10]

@SIUYA I generally agree with what you say. The thing is there are almost an infinite number os ways of looking at perofrmance comparison. That is NOT the purpose of this thread. I have merely been trying to give very simple and obvious examples of real world situiations where it is shown conclusively that the markets are not random. Problem is people want to argue and fight and try and prove me wrong. Perhaps they are academics who can'rt handle reality of the real world. I do not know. Nor do I really care. I know with 99.9% certainty of what I am talking about because it is based on 30 years of observation, reading, personal study and research and testing.

 

I suggest people who are still undecidfed if markets are random or not, to start working harder and create a simple trading model that worked in the past, then do a walk forward test and see if it works in the future. A trading model that is well designed, and NOT curve fitted (as distinct from optimised) will perform similarly into the futre as it did in the past (assuming similar market conditions). The more it underperforms the more you have curve fitted your model. It is basically as simple as that.

 

Here's another though that just came to mind of a report I read recently. Sell in May and go away. I'm sure you have all heard of that before. Are you aware that virtually all of the S&P500 returns over the past 100 years has come in the Nov-May period. Not most of, but virtually ALL the returns. That is truly an astonishing and powerful piece of information. If the markets were random, surely the money returns would all be roughly similar over the long run? Let's see how long it takes for someone to attack this piece of fact as well LOL.

 

Do you think that it is possible to drill down through the time frames in a line of non random data.

Nov-May is the big TF and the unequal distribution of daily High/Low is an intraday example

In other words do you think it is possible to 'line all the planets up'

[Adrian 10]

@MM You believe your words are clarity. That may be the case in your own mind, but if you decide to make a public post, the thoughts need to be clear in the readers mind as well. And that clearly wasn't the case on so many levels and points with your post.

 

If you believe hedge funds as a whole underperform the market on a risk adjusted basis over the long term, then I would be happy to see the facts upon which you draw this conclusion. I also assume that because you state this that you believe markets are completely random, as that is the whole point of this thread right? To suggest otherwise means you wqere simply being argumentative and going off topic.

 

We all await your evidence MM.

[Adrian 10]

Hi Horace,

 

I'm not sure I understand what you mean. If I understand what you are asking, is it possible to tak a number of seemingly non-random situations and wait for them all to align to theoretically get a slam dunk trade. If this is wrong, please correct me. This idea is largely flawed. It assumes that each of the situations is additive (there is a stats term which I cannot think of right now which decribes it) but it does not work that way. It is a bit like saying I have 5 different oscillators, I will wait till they all get overbought before I sell. This doens't work either.

 

Perhaps you could do research on whether the daily lows forming in the first hour of trading in Nov-May period occur more often than in the June-Oct period. That might be interesting to see. I think you would find though, as a guess, that the differences weren't as great as you might think. But any statistical bias is a bias none the less. I would also suggest the yearly seasonal bias means you should pay more attention to buy signals in the Nov-May period and sell signals in the June-Oct period. If you do the research Horace you will also find a seasonal bias WITHIN each month. People have done research in line what what you are suggesting but it has been quite a while since I saw any.

[horace 10]

Have you heard of binary trading already?'

 

No, please tell me about it

[Adrian 10]

are you talking to yourself horace?

[horace 10]

are you talking to yourself horace?

 

 

Not yet, but it is still early days and anything is possible.

 

I just wondered if whoever posted "Have you heard of binary trading already"

would care to explain it's relevance to me in simple terms

[zdo 20]

It is quite amusing hoqw quickly threads go off topic

 

..beliefs...

 

Over half of the posts on the pages of this thread are specious arguments.

“Proving” that market participants’ returns are or are not random does nothing to prove that market action is or is not random… like "proving" the randomness or non randomness of local snow accumulation does nothing to "prove" that snowflake shapes are random or not random… and "proving" or "disproving" zero sum will take you no where in determining if the market streams are random or not either… talk about gaming our own minds, good lord…

 

How many of you have considered that NOTHING is random – not even gaming streams, deals, spins, rolls, etc. … nor are streams that utilize ‘random generators’ … nor are particle, quark, and nuon behaviors…or multiverses, etc ? No process is random, but all of these streams are “random-like” – some more than others...

Stick around a few years, you’ll see the new paradigm will be ‘market price streams are (only) random-like” zdo (and you can quote me.)

 

Also, consider that the degree of market streams “random-like-ness” ultimately has almost nothing to do with determining whether one can extract returns from the game or any other game… I'd bet that last little bit of heresy will fire up some 'clinging to belief' reactions, too…

 

... so Horace, in simple terms... Binary option - Wikipedia, the free encyclopedia...

sadly it has no relevance to the topic at all... unless one is still trying to work out if a stream is either random or not...

[Adrian 10]

@zdo If readers didn't understand my simple examples, they certainly won't have a clue what you are talking about LOL The question on this thread is "are markets random or not". Simple question, and it deserves a simple and easy to understand answer. Only those trying to pretend how good they are, or how little they know, will respond with answers that are so complex that no one can discuss what was said.

 

Your conclusion that because hedge returns might not show randomness, does not prove that markets aren't random. Actually it does I believe. As I said in a prior post, if we take a simple game like roulette where there are only 18 black and 18 red numbers, and we assume a totally mechanical process for throwing the ball, then we have an EV of ZERO, and we know with certainty that there is no mathematic way to make money in the long run. If we assume the markets are the same process as routlette (i.e. totally random outcomes), with no memory bias in any form, then, fund mangers would not be able to make excess returns. Now we can't analyse returns of traditional equity fund mangers because it is their function to invest long only at all times. To them, being 70% long is the equivalent of us being ssquare or short, as they simply do not have the option of going to cash in most cases. So this is why we look at something like hedge fund managers who have more flexibility. Anyway, we know as a group they make money with less risk than the returns created by the S&P500 index (let's ignore the idiots who want to argue and disagree for the moment). Now if the markets were random, then the returns the hedge fund mangers create would not be possible. Sure some would make money and some would lose, forming a normal distributiuon curve, but we both know that isn't the case. So it seems to me, the fact that hedge fund mangers can make excess returns implies the markets cannot be random. This was just one of a zillion different ways of showing how markets aren't random. Also, it shows that because many people can make money consistently, then you can too.

[MightyMouse 12]

@MM You believe your words are clarity. That may be the case in your own mind, but if you decide to make a public post, the thoughts need to be clear in the readers mind as well. And that clearly wasn't the case on so many levels and points with your post.

 

If you believe hedge funds as a whole underperform the market on a risk adjusted basis over the long term, then I would be happy to see the facts upon which you draw this conclusion. I also assume that because you state this that you believe markets are completely random, as that is the whole point of this thread right? To suggest otherwise means you wqere simply being argumentative and going off topic.

 

We all await your evidence MM.

 

I think you have enough information and resources available to draw your own conclusions.

[zdo 20]

Playing The Probabilities – Blackjack, Shuffles, And Residual Correlations

 

so for in our world, does a market reshuffle????????????

... and if so, how ????????????????????????

[dangermouseb 10]

@Adrian - The question on this thread is "are markets random or not".

 

The question is how do you know the market's aren't random.

 

It's a shame this thread has gone so off thread with people using it as a reason to argue with each other.

 

I was offering also to generate some random data on the back of the answers to challenge and explore anybodies answer, but so far noone has explained in a non hand wavy manner how they know the market isn't random.

 

:doh:

[Adrian 10]

@dangermouse Avtually I have explained in various and simple ways that people and go away and prove to themselves that markets aren't random. If you had actually read my posts and had your brain switched on, then you would know this. But this is the crux of the problem. Like so many people in the world Danger, you represent so many, who want something handed to them on a platter, but even then that is not enough, as so many people are simply non-thinking zombies, incapable of using the measgre intelligence they have. Sadly there is nothing I can do about that. I try to get people to think for themselves, but I have found throughout life I am fighting an overwhelming level so of voluntary ignorance.

[Adrian 10]

@Mighty So what you are saying is you are all hot air with zero evidence. Why am I not surprised This is another classic. Everyone has a view or opinion, but when you question them as to how they came by that view, they struggle to find an answer. they struggle to present any evidence on which they based their opinion. Try it yourtself next time with someone when they express a view. I dare say 80% of th etime you will have them struggling. I does get pretty boring running into thee sort of people over and over again. It should really be no surprise then why so many lose in the markets. This just becomes another reason. People trade based on some flawed belief ('oh I read it in some book somewhere') they have, never really wanting to admit to themselves why they are losing.

[MightyMouse 12]

@Mighty So what you are saying is you are all hot air with zero evidence. Why am I not surprised This is another classic. Everyone has a view or opinion, but when you question them as to how they came by that view, they struggle to find an answer. they struggle to present any evidence on which they based their opinion. Try it yourtself next time with someone when they express a view. I dare say 80% of th etime you will have them struggling. I does get pretty boring running into thee sort of people over and over again. It should really be no surprise then why so many lose in the markets. This just becomes another reason. People trade based on some flawed belief ('oh I read it in some book somewhere') they have, never really wanting to admit to themselves why they are losing.

 

You seem to be pretty good at reading my mind and the minds of others on the thread. Hopefully, you can craft that skill or art into something other than a circus side show.

 

If you do not want to accept that the information you offered as evidence is rubbish and want to take my refuting it personally and then get personal with me, it is a clear indication of your character and development as a human being and ability to learn. If you want to believe industry propaganda about hedge fund returns, or any other good or bad statistic, you can do it on your own without me providing support for or against it. This is a public forum and, for the benefit of the thread, I pointed out that your evidence was complete bullshit without asking for your evidence to support it because I know it is bullshit propaganda.

 

Next you will be promoting penis enlargement pills and providing the manufacturers evidence and money back guarantee as support or you will simply conclude that size does not matter.

[Adrian 10]

@MM I understasnd people, so yes it is pretty easy actually understanding where people are coming from. Markets are merely people interacting. If you do not understand yourself, and others, and understand the most basic of human behaviours, then you likely won't succeed in trading.

 

'Accept the information offered to me'? You have offered none, except to say I am wrong. LOL You seem to be living in a fantasy world MM. I askedyou to present evidence of your stated claims and you conveniently backed away, as you are doing now. Then you go on to to suggest am am merely spouting forth industry propaganda LOL OMG that is truly funny. Now I know exactly the type of person you are. Very sad indeed. I am EXTREMELY familiar with people who are unable to accept the reality in front of their eyes, presented in factual academic well researched documents. Not to mention my owning trading research (how would that be industry propaganda?). Your type always need to believe in another reality. Let me say, that if you try to live your life outside of reality, you will die a very sad, angry, frustrated and disappointed person. The information I have presented is anything but industry propaganda, what ever that may mean in your eyes. Your attempt to point out that my information was BS was no doubt considered laughable by most on this thread, as you provided ZERO evidence, except to say 'I was wrong' LOL You seem really angry that I have released such basic information actually, as though it really meant something to you. I know I am not misleading others on the thread, so you can't be angry aobut that.

 

Then finally to completely destory any credibility you have you attempt to align me with people marketing penis enlargement pills LOL What can I say? You are one seriously deranged person. I strongly sugrst you see a therapist very quickly MM, as you have some seirous personality flaws. I have done nothing but be helpful on here, providing good starting points for people to follow up with, to easily show in some small way how markets are not random. I'm sorry you can't handle that. I would suggest you sign off from this website and have a rethink of your life before coming back here, and for heavens sake, please stay away from trading. you wil lose all your money.

[MightyMouse 12]

@MM I understasnd people, so yes it is pretty easy actually understanding where people are coming from. Markets are merely people interacting. If you do not understand yourself, and others, and understand the most basic of human behaviours, then you likely won't succeed in trading.

 

'Accept the information offered to me'? You have offered none, except to say I am wrong. LOL You seem to be living in a fantasy world MM. I askedyou to present evidence of your stated claims and you conveniently backed away, as you are doing now. Then you go on to to suggest am am merely spouting forth industry propaganda LOL OMG that is truly funny. Now I know exactly the type of person you are. Very sad indeed. I am EXTREMELY familiar with people who are unable to accept the reality in front of their eyes, presented in factual academic well researched documents. Not to mention my owning trading research (how would that be industry propaganda?). Your type always need to believe in another reality. Let me say, that if you try to live your life outside of reality, you will die a very sad, angry, frustrated and disappointed person. The information I have presented is anything but industry propaganda, what ever that may mean in your eyes. Your attempt to point out that my information was BS was no doubt considered laughable by most on this thread, as you provided ZERO evidence, except to say 'I was wrong' LOL You seem really angry that I have released such basic information actually, as though it really meant something to you. I know I am not misleading others on the thread, so you can't be angry aobut that.

 

Then finally to completely destory any credibility you have you attempt to align me with people marketing penis enlargement pills LOL What can I say? You are one seriously deranged person. I strongly sugrst you see a therapist very quickly MM, as you have some seirous personality flaws. I have done nothing but be helpful on here, providing good starting points for people to follow up with, to easily show in some small way how markets are not random. I'm sorry you can't handle that. I would suggest you sign off from this website and have a rethink of your life before coming back here, and for heavens sake, please stay away from trading. you wil lose all your money.

 

If i had a remote desire to prove anything to you, i would provide you with the raw data that details these rather simplistic and common findings that most people with more than a superficial interest know. I have no desire to prove anything to you so, then, you have discredited my statements and it will stand that hedge funds enjoy a high return and low volatility, they walk on water, and etc. You are a legend and an asset to this forum.

[Adrian 10]

@MM It is not about proving anything to me. I merely made my original post on this thread to help answer the person who asked the original question. It has been almost every post since then that everyone else has tried to attack and divert the thread elsewhere. No surprise to me as I have see it so many times in so many situations. Part of the flaw that is being human. I'm sorry I even bothered trying to help. I should have known that it would end up this way. I'm done posting. This has been a vast waste of my time. I hope at least one or two quiet lurkers have benefited in some small way from the factual information I provided. I wasn't providing opinion, but verifed fact from any number of research reports that have been published many times over the years, and from many different sources. So clearly not industry propaganda as one clueless idiot suggested. Yes, they are clueless and they are an idiots, as only those two types of people would even attempt to disagree with such simple concepts that I presented, that have been verified time and time again in the real world.

 

I suggest readers analyse carefully what has transpired in this thread, because it gives you an insight into the market particpants you are trading against. You are witnessing a lot of angry and insecure people out there. People who think they know more than they do. People who only have an interest in attacking, creating controversy, and generally trying to show how much better they are than everyone else (ego issues). It is these sort of people who will fund your retirement as wealth is transferred from them to you, by carefully trading market characteristics that have shown to have some degree of non-randomness.

[bobcollett 10]

@zdo As I said in a prior post, if we take a simple game like roulette where there are only 18 black and 18 red numbers, and we assume a totally mechanical process for throwing the ball, then we have an EV of ZERO, and we know with certainty that there is no mathematic way to make money in the long run. If we assume the markets are the same process as routlette (i.e. totally random outcomes), with no memory bias in any form, then, fund mangers would not be able to make excess returns. .

 

Hi Adrian,

I support your view. Markets are not random.

Just a thought on your roulette analogy

What about money management?A simple double up system will give you a profit , with the ZERO removed.

Kind regards

bobc

[Adrian 10]

Hi Bob,

 

Money management is clearly critical to long term growth within a defined risk environment (which is something personal to each person). Problem is no money management method will allow us in REALITY to make money where the EV is ZERO or lower. This has been proven time and again mathematically. The real world of doubling our bet size each time will run into casino limits, will run into CFTC positon size limits, will run into liquidity issues no matter what instrument you trade, and will ultimately fail as well due to increasing slippage on each order. You would also need virtually unlimited funds as well to trade in such a way. And I dare say if you had unlimited funds, who the hell cares about trading? LOL

[SIUYA 11]

@Adrian - The question on this thread is "are markets random or not".

 

The question is how do you know the market's aren't random.

 

It's a shame this thread has gone so off thread with people using it as a reason to argue with each other.

 

I was offering also to generate some random data on the back of the answers to challenge and explore anybodies answer, but so far noone has explained in a non hand wavy manner how they know the market isn't random.

 

:doh:

 

Cut your losses - as some people cannot seem to do - Maybe you could start another thread titled "Markets are random or not?

I think this shows that despite all the presented evidence - know one really knows and "facts" can and do change depending on circumstance, tests, and what you are trying to define. It will always be argued from both ways....again depending on your perspective.

Just as in physics - perspective is everything. A bit like the debate about the goldfish living in its bowl and its perspective on physics and the universe.

 

Maybe just accept that maybe from a trading point of view it does not matter - so long as you focus on what is important as a trader......or let the discussion continue elsewhere and if anything it might show that some people are more interested in other topics that what is at hand.

[SIUYA 11]

Adrian - just as an aside. While most people might agree with you and welcome heated debate, calling everyone an idiot, and having their head stuck up their arse....or equivalent will not endear you to people anywhere in the world. If in your experience everyone is beyond help, then leave them to it....dont frustrate yourself. The world always needs people to build the roads.