Is price movement really random and unpredictable?

My favorite author and favorite book.

He and this book changed the way I trade options.

 

How so?

 

Although the value of price returns are random like in this dataset: (+0.1%, +0.05%, +1.5%, +2.5%, +0.01%) during a trend the direction of price, which is a sequence of n closing prices, is not random (UP, UP, UP, UP ,UP).

 

And how do you propose to identify when these up moves begin and when they end with anything other than 50% precision over a statistically relevant amount of trades?

 

Here is one quote from the book I totally agree:

t h e b a c k t e s t er

A programmer helped me build a backtester. It is a software program

connected to a database of historical prices which allows me to check

the hypothetical past performance of any trading rule of average complexity.

I can just apply a mechanical trading rule, like buy NASDAQ

stocks if they close more than 1.83% above their average of the previous

week, and immediately get an idea of its past performance. The screen

will flash my hypothetical track record associated with the trading rule.

If I do not like the results, I can change the percentage, to say, 1.2%. I

can also make the rule more complex. I will keep trying until I find

something that works well.

What am I doing? The exact same task of looking for the survivor

within the set of rules that can possibly work. I am fitting the rule on the

data. This activity is called data snooping. The more I try, the more I am

likely, by mere luck, to find a rule that worked on past data. A random

series will always present some detectable pattern. I am convinced that

there exists a tradable security in the Western world that would be

100% correlated with the changes in temperature in Oulan Bator,

Mongolia.

 

Rare events, Black Swans are underpriced.

In 2014 I switched from writing options, collecting "free" money to buying DOTM options. Have been doing that since.

The rest is history.

 

Wow, unless you can look into the future, that sounds super risky.

 

Why is it risky? As a buyer, my risks are bounded but my rewards unbounded.

The smart professional option traders all trade combinations, spreads and exploit the microstructures, the skews.

As an amateur retail I don't have the skills so have to do something unconventional to make money.

 

But do you not agree that most "DOTM" expire worthless (for a reason)?

 

Absolutely, probably 95-99%.

The job is to hunt for the 1-5% that have a chance of breaking out. It is not easy but I do sleep well knowing what my max losses would be.