Random Walk Down Wall Street

[cfrn 10]

Special Thanks to Burton Malkiel for graciously joining our discussion on Efficient Market Theory and his book "Random Walk Down Wall Street". Mr. Malkiel is a Professor at Princeton, Noted Author and Market Participant.

As die-hard Technical Analysts ourselves, we have waited months for Burt to find time in his busy schedule to chat with us. You will find him charming even if you disagree with him.

 

To listen to the interview simply click the headphones above.

Please share your thoughts on what Burt has to say regarding his theory and popular book (now in its 11th printing) and why you as a Technical Analyst do not believe the markets are random.

 

I look forward to your comments.

Edited August 18, 2012 by cfrn
added Burt's picture

[bobcollett 10]

Hi cfm,

There isn't a TEXT version of this interview around somewhere?

regards

bobc

[cfrn 10]

Bob,

We just did the interview on Thursday and I have not had an opportunity to have it transcribed as of yet. Feel free to check back with me next week.

 

Regards

DeWayne

[MightyMouse 12]

People who try to predict the markets and fail decide that markets are random. Efficient market theory explains why they can't get an edge on other traders.So, since the author cannot find an edge and he is smarter than most, then others can't find an edge either because they are not as smart as he thinks he is; therefore, finding an edge is not possible and if patterns are not discernible, then markets must be random,

 

If anyone is buying into the flawed logic of random markets, compare randomly generated chart data to a days price activity. If you think they are the same, then you are as smart as the author and should quit trading.

 

If it were random, then 95 percent of people could not lose.

[40draws 10]

  MightyMouse said:

People who try to predict the markets and fail decide that markets are random. Efficient market theory explains why they can't get an edge on other traders.So, since the author cannot find an edge and he is smarter than most, then others can't find an edge either because they are not as smart as he thinks he is.

 

Well put, as this seems to be a common character trait, a sort of "intellectual defense mechansim" of trading forum posters. "If I couldn't do it, then neither can you, because if you could do it, then I would have been able to do it too, and better."

[DbPhoenix 42]

  40draws said:

Well put, as this seems to be a common character trait, a sort of "intellectual defense mechansim" of trading forum posters. "If I couldn't do it, then neither can you, because if you could do it, then I would have been able to do it too, and better."

 

"Common" is right. According to behavioral economics studies, traders, with few exceptions, are far more confident than they have any right to be, they trade far too much, and they believe they're far smarter than they really are. Given that it takes so long for any of them to show a profit, if they ever do, this state of affairs leads to a cognitive dissonance that I find interesting, though not puzzling.

 

What I also find interesting is the self-actualization cheerleading squads that one finds on trading forums, "traders" who aren't terribly successful, who discourage others from achieving success because it's all so hard (and if others were to find success, this would necessarily lead to a level of self-examination which is to be avoided at all costs) but yet encourage those who are having difficulties to continue (for if those others were to quit, then perhaps they themselves should consider quitting as well, which would be an inescapable admission of failure which, again, is to be avoided at all costs). They believe they're being supportive when they are actually enabling an addiction.

 

The psychodynamics of this are fascinating to me, as is the fact that so many of these traders love the psychology forums and psychology articles. It's about emotions, you see. If it weren't for those pesky emotions, they'd be hugely successful. For the psychologists, this constitutes what is termed "low-hanging fruit". All of which may seem off-topic, but is just another means, like the efficient market hypothesis, of finding an excuse for failure that is outside oneself.

 

Hard cheese, I know, but there it is.

 

Db

[40draws 10]

  DbPhoenix said:

... if others were to find success, this would necessarily lead to a level of self-examination which is to be avoided at all costs ... which ... is just another means, like the efficient market hypothesis, of finding an excuse for failure that is outside oneself.

 

Hard cheese, I know, but there it is.

 

Db

 

I hope my editing preserves the intended meaning of your post.

 

How many of these failed individuals know why they continue to struggle and fail? There seems to be a propensity for self-absorption and a distinct aversion to self-exploration.

 

I'm new to this business. I admittedly have much to learn. While I am confident in my ability to succeed, I do not think I have under-estimated the difficulties involved. After all, I have devoted nearly every free waking moment for going on six weeks to studying the problem of how to make consistent short-term profits from trading in stocks. But I know that if something isn't working, then there is a reason, and the reason is going to be either I am deficient in my knowledge or I am deficient in the execution of my plan. In either case, the buck stops here with me.

 

Of course, in the case of the many, it may be the case that after having sought answers not in themselves but rather in all the wrong places (another book, another methodology) for a period of months or years, these individuals no longer have the ability to sort out what pertains to the real world of the markets from all the layers of, for lack of a better word, "stuff " which their exploration of countless books and methodologies has created in their understanding, in which case self-examination itself would likely become just another failed project.

[DbPhoenix 42]

  40draws said:

I hope my editing preserves the intended meaning of your post.

 

How many of these failed individuals know why they continue to struggle and fail? There seems to be a propensity for self-absorption and a distinct aversion to self-exploration.

 

Given that this is probably straying too far into the off-topic, I won't go into any detail. But then, I probably don't have to.

 

A trader without a trading/business plan is a gambler, and the same defect/gene/flaw that characterizes those with gambling addictions characterizes those traders you describe. So, few to none of these "failed individuals" know why they continue to struggle and fail. They instead blame the market, or the algos, or the HFTs, or their broker, or whoever is running their trading room, or whoever sold them their software/dvds/manuals/indicators. The market is "the enemy", even though the market has no idea who they are and couldn't care less. Or other traders are the enemy. But the loser's only enemy is himself, and this rarely changes. He simply goes broke and disappears.

 

The gambler who can't push himself away from the table because he "feels" that he's going to filll an inside straight is no different from the "trader" who can't stop transmitting long orders because he "feels" that whatever it is is going to go up.

 

As for the aversion to self-examination, that's a bit more complicated. In some ways, traders are nearly obsessed with self-examination. Hence the popularity of the "psychology of trading" aspect. This generally boils down to the emotions and controlling the emotions and/or using the emotions and/or seeking out that approach that "suits" them. But there's rarely examination of what the market demands and whether or not the trader has what it takes to meet that demand. The market, in other words, is going to do what it's going to do, and it couldn't care less whether the trader is comfortable with that or not. If the trader can't figure out how to deal with the market on its own terms, he's going to fail.

 

Now if you want me to go into detail...

 

Db

[MightyMouse 12]

  DbPhoenix said:

Given that this is probably straying too far into the off-topic, I won't go into any detail. But then, I probably don't have to.

 

A trader without a trading/business plan is a gambler, and the same defect/gene/flaw that characterizes those with gambling addictions characterizes those traders you describe. So, few to none of these "failed individuals" know why they continue to struggle and fail. They instead blame the market, or the algos, or the HFTs, or their broker, or whoever is running their trading room, or whoever sold them their software/dvds/manuals/indicators. The market is "the enemy", even though the market has no idea who they are and couldn't care less. Or other traders are the enemy. But the loser's only enemy is himself, and this rarely changes. He simply goes broke and disappears.

 

The gambler who can't push himself away from the table because he "feels" that he's going to filll an inside straight is no different from the "trader" who can't stop transmitting long orders because he "feels" that whatever it is is going to go up.

 

As for the aversion to self-examination, that's a bit more complicated. In some ways, traders are nearly obsessed with self-examination. Hence the popularity of the "psychology of trading" aspect. This generally boils down to the emotions and controlling the emotions and/or using the emotions and/or seeking out that approach that "suits" them. But there's rarely examination of what the market demands and whether or not the trader has what it takes to meet that demand. The market, in other words, is going to do what it's going to do, and it couldn't care less whether the trader is comfortable with that or not. If the trader can't figure out how to deal with the market on its own terms, he's going to fail.

 

Now if you want me to go into detail...

 

Db

 

The road to trading extinction is paved with perfectly executed flawed plans. An individual needs to know how to trade before he can build his plan. Trading is not buying or selling when a pattern appears or a line crosses over another; trading is knowing how to buy low from traders who are desperate to sell and then selling back to others who are desperate to bu. It is also knowing when not to buy or sell or when to sell instead of buy or buy instead of sell. Novice traders buy at the wrong time and sell at the wrong time, genreally because they are easily fooled; hence, they do not know how to trade. Adhering strictly to a flawed plan will likely minimize losses, but it won't give the trader what he is looking for.

[DbPhoenix 42]

  MightyMouse said:

The road to trading extinction is paved with perfectly executed flawed plans.

 

I agree, and one hopes that a trader who can tie his own shoes will realize shortly that his plan is the bunk.

 

But it's not a perfect world:cool:

 

Db

[SIUYA 11]

i agree with a lot of the above posts...but also wonder how relevant efficient markets and random walks research are to discretionary (day) trading, where the ability to not do and take every trade or every time a pattern occurs is the edge......It maybe an unfair comparison.

[DbPhoenix 42]

And apropos of nothing, I find it interesting in light of 40d's last post that message board citizens will do everything they can do prevent a struggling trader from quitting but also go out of their way to discourage a fledgling trader from beginning (it's so hard, takes so long, few people succeed, etc, etc).

 

Just an observation.

 

Db

[DbPhoenix 42]

  SIUYA said:

i agree with a lot of the above posts...but also wonder how relevant efficient markets and random walks research are to discretionary (day) trading, where the ability to not do and take every trade or every time a pattern occurs is the edge......It maybe an unfair comparison.

 

The movements and "patterns" are the same, just faster. Prices regularly move in advance of information being made available to the great unwashed. One just has to watch the trading activity and the trading levels rather than wait around for the news.

 

Db

[40draws 10]

  DbPhoenix said:

And apropos of nothing, I find it interesting in light of 40d's last post that message board citizens will do everything they can to prevent a struggling trader from quitting but also go out of their way to discourage a fledgling trader from beginning (it's so hard, takes so long, few people succeed, etc, etc).

 

Just an observation.

 

Db

 

And from discouragement to outright attacks:

 

  bobcollett said:

Its a con.

 

The "Its" referred to is me, of course.

 

And my favorite:

 

  Whidbey Island said:

If your(sic) new & successful however not learning from another trader I would say keep your mouth shut

 

I am, of course, the "you" referred to by the "your (sic)" - apparently this individual considers the self-educating trader an affront to the mentoring profession.

 

Certainly not the responses I would have expected when I first chose to participate. Especially as I have not claimed to be a succesful new trader. My fault is that I put what is effectively a "stop loss" on my attempt to learn to trade for a living. At six months, I am either clearly on the road to success or I am out. It seems as though the majority have chosen to let their losses run.

[bobcollett 10]

  40draws said:

And from discouragement to outright attacks:

 

 

 

The "Its" referred to is me, of course.

 

And my favorite:

 

 

 

I am, of course, the "you" referred to by the "your (sic)" - apparently this individual considers the self-educating trader an affront to the mentoring profession.

 

Certainly not the responses I would have expected when I first chose to participate. Especially as I have not claimed to be a succesful new trader. My fault is that I put what is effectively a "stop loss" on my attempt to learn to trade for a living. At six months, I am either clearly on the road to success or I am out. It seems as though the majority have chosen to let their losses run.

 

Sorry neg,

Nothing personal

bobc

[SIUYA 11]

  DbPhoenix said:

The movements and "patterns" are the same, just faster. Prices regularly move in advance of information being made available to the great unwashed. One just has to watch the trading activity and the trading levels rather than wait around for the news.

 

Db

 

I agree they are faster but I think comparing EMH with the day trading whereby you are square every night, may only be applied to one instrument and there is no requirement to have to trade is fair. One of the issue people have is measuring a individual trader v someone who has to run a portfolio - a lot of these guys are not allowed to deviate to allow out performance, or their business model actively discourages them to do so.

 

Alternatively when I think about it - its basically exactly what it is - can a person beat the market (even if its one market) consistently or over the long run - even if they only do one trade a year, or 1000s......

I do take the Taleb approach that the markets are at best poorly measured.....and mostly by a model that is at best a representation of how we might see an ideal market. Problem is the markets constantly throw in things like flash crashes, liquidity issues and such.

 

I dont think markets are efficient in their pricing - and for me the simplest evidence is that they generally do trend between price levels allowing you to trade, whilst at other times they do gap when no real fundamental information changes (a trigger point may have occurred). Would you think that as fundamentals change, the prices would gap more, and yet the large gaps should occur less......now as to weather people can outperform them might be another story....there will always be some.

Its in one of those great never ending debates I guess - no matter what research or ideas you subscribe to there will be varying schools of thought, and it will depend on how long your time frame for outperformance is......as they say in the long run we all tend towards zero (or something of the sorts)

 

Anyways - as its theoretical allows for all sorts of assumptions, ideas and thoughts.

[DbPhoenix 42]

  40draws said:

Certainly not the responses I would have expected when I first chose to participate. Especially as I have not claimed to be a succesful new trader. My fault is that I put what is effectively a "stop loss" on my attempt to learn to trade for a living. At six months, I am either clearly on the road to success or I am out. It seems as though the majority have chosen to let their losses run.

 

If you have little experience with message boards, you'll find that the threads have relatively short "expiration dates". This is why I stopped posting to the other thread. People, including me, had begun repeating themselves, so there was little value in going on, and, at this point, few will bother reading the thread before providing what they believe is a cogent analysis of you. In print. In public. Even to the extent of leveling accusations against you. One gets used to this after a while, but the insidious snarkiness prevents the forums from being what they otherwise could be. Now if you were asking advice on stochastic settings or Ichimoku clouds or how to stalk the "smart money" (other than just following a simple price chart), people would be lining up to provide the sort of advice that would extend your task into the far horizon but place you on the community treadmill.

 

I suggest you get on with the work and let the other thread go on without you, which it will, at least until it's no longer billboarded on the homepage. While many of the forums and threads are populated by the quietly -- and not so quietly -- desperate, there are also forums that are civil and helpful. I hope the Wycoff Forum is one. The Market Profile Forum is another. Surely there are others. But the "successful trader" thread isn't going to be one of them.

 

And now back to the topic of this thread:)

 

Db

[TheNegotiator 13]

When someone claims the "markets are random" I'll tell you what springs to mind. "The Earth is flat" knowledge which some very well educated people once believed in. It looked flat to them though and to all intents and purposes it was (just got to watch out for that pesky edge at the 'end of the earth'!). There is nothing random about the markets, only action of which the causes are not apparent to us. How can they be? How can we know what all other traders are doing or about to do and the positions they hold and so on? How can we know what the latest jobs data will be this Friday and what, given traders' positions/objectives, the market reaction to that data will be? We can't. Does that make it random though? No. What we can do is assess the chances of the market reacting technically in some way and then manage positions by way of what we see is happening. We must account for a shortfall of knowledge by managing positions - i.e. information risk and assessing the manner of the current auction.

 

To me if the markets really were a "random walk" then their would be no sense in technical analysis whatsoever. Levels would not exist and momentum would have no bearing on the next print. There would be no point to historical charts at all and picking an entry point would have zero effect on the outcome of a trade. So I'd say, next time someone suggests the markets are random, ask them if they use a chart.

 

(btw I didn't listen to the interview)

[bj139 10]

Three words: "Supply and Demand"

 

If there is increased demand, prices will rise. If there is increased supply, prices will fall.

 

If the supply of money is increased, prices will rise. If the supply of money is reduced, prices will fall.

 

Doesn't seem random to me. The Federal Reserve knows this has always been true.

 

If the supply of houses is in excess of the demand, prices will fall, unless the supply of money is increased.

Then, all prices EXCEPT house prices will rise since they have been inflated by previous policy and still want to fall past their median price.

 

I think I've said too much. I DO want to give away all the secrets I have noticed, hiding in plain sight, but I am just blathering now. The markets ARE manipulated. For proof, just watch the Federal Reserve show on the financial news. TRADE IN THE DIRECTION OF THE MONEY FLOW FOR BEST RESULTS.

 

If day trading; never mind.