Markets and randomness

Discussion in 'Trading' started by yabz, Oct 14, 2002.

  1. cpo

    cpo Guest


    Would you mind explaining how you came up with the definition "spontaneaous-organic-harmony"?

    Your first quote reminds me of Eugen Herrigel, in Zen in the Art of Archery:

    " use some expressions which are nearest the heart of the Masters, it is necessary for the archer to become, in spite of himself, an unmoved center."

    Thanks as usual for trying to verbalize your experience of trading. :p

    With good wishes in your quest for self knowledge.

    #21     Oct 15, 2002
  2. yabz


    I do not believe that markets are chaotic. A chaotic equation will produce too many runs to pass the test.

    Also, I don't think the time frame makes any difference. Days, weeks or years, they are all random. I cannot comment on smaller time frames than days as the data is not easily available.

    #22     Oct 15, 2002
  3. yabz


    Some of the points you make are very valid.

    However intuition and gut feeling can be misleading. Intuitively one would say the earth is flat; that the sun goes round the earth.

    The lesson of history is that the only knowledge worth having is that provided by the scientific method.

    #23     Oct 15, 2002
  4. Yeah, I guess the 100 year DOW chart is random -- I mean, it surely looks random, doesn't it?

    I guess when a story comes out that a certain CEO has been monkeying around with accounting that it is merely random that the stock goes down.

    In fact, stocks are so random, we can just acquit Martha Stewart right now. Otherwise, how on earth could she be guilty of predicting randomness?
    #24     Oct 15, 2002
  5. yabz


    The Fed announces that its going to lower interest rates.

    5 minutes later India declares nuclear war on Pakistan...

    #25     Oct 15, 2002
    #26     Oct 15, 2002
  7. DT-waw


    To yabz:
    (I guess darkhorse, nitro, metooxx, Commisso, 2Good2Care, daniel_m already know this :D )

    Markets move in non-linear way. It means they don't move with some specific mathematical formula.
    "Random" means that you always have 50% chance to win or lose certain amount of money on every trade/bet. When you trade real markets, you don't know what exact probabilities are. Markets aren't a slot machine or a roulette wheel. They're alive organisms sometimes experience orgasms, can be boring, nervous. Just like women: you'll never know what's gonna happen! But you can learn how to deal, live with them. Every market and woman is different in details, similar in general character... they all have fractal nature :)
    #27     Oct 15, 2002
  8. Well then I guess everything is just random, now isn't it? Ever since the big bang, particles are just randomly going here and there. The girls I happen to date in my life will be random -- the jobs I get will be random -- the people I meet at the grocery store will be random.

    In fact, it is suffice to say that everything that occurs in nature is really "random."

    Here is a freebie for you. Anything labeled "random" is just another way of saying, "I don't know all the variables well enough to accurately predict above 50/50 what will happen during each occurrence."

    I'm no math idiot, either. I have gone up to Number Theory, so you can bring out all the equations you want -- although the equations may prove a random distribution, you aren't accounting for extraneous variables that are constantly present in any given system.

    Take for instance the BLACK-SCHOLES option pricing model. This equation bares a large resemblance to another standard heat dissipation equation. The model applies well to "MACRO-LEVEL" events. However, does this model always accurately predict what will happen on a micro-scale with each stock? Of course not! Do you think Sullivan's nephew gave a shit about your randomness when he was buying put after put in Worldcom?

    You could easily prove, as you just did, that given macro-data on a large data-set and excluding OTHER VERY IMPORTANT MICRO DATA-SET VARIABLES that stocks and futures are indeed more-or-less random.

    The key here is that your conclusion is flawed because you over-generalize your hypothesis on a specific data-set without considering other variables that would affect the overall testing procedure.

    I don't know how else to explain it -- but good traders are not just a fluke on a bell-curve as your data would suggest!

    If you were watching futures on September 11'th, 2001, you would have noticed that they went down after the first plane hit the tower. Since it wasn't known at that time that it was the beginning of a large terrorist event, the market did not react strongly at that point. The "mainstream" information at that point was that it could have just been a plane that "accidently" hit one of the towers -- perhaps a small Cesna with a drunk pilot.

    However, localized information would have given you a 99% probability of making the right play in the market. Someone somewhere in N.Y. City saw that it was indeed a 747 type airplane that creamed straight into that building. Whoever shorted the market at that point, acting on "specific information" that your model excludes, would have made a lot of money.

    The point is that the markets appear random until you find some variable that you can exploit. The best variable is inside knowledge of something, but since most of us cannot obtain that, you have to dig deep until you find something that apparently works.

    Your equations only prove that macro-events in the market are random without considering small but very important micro-variables.

    I hope this helps you.
    #28     Oct 15, 2002
  9. Just in closing, I also want to mention that there is a time and place for all things in life. There is a time to apply meticulous and rigorous science and a time to apply art. There is a time to focus on strict logic and a time to rely on "fuzzy logic."

    The Ph.D. in Mathematics and Nuclear Physics may be an expert at understanding precisely what is occurring inside his large superconducting rings, but it may take another branch of science to understand the implications those tests will have on other areas of science.

    Everything in life requires balance. You have to set your mind free to see through the mechanical while also fully understanding what mechanical REALLY MEANS. This may sound like more psych BS, but this is really pertinent information for many things -- especially trading.

    If your trading isn't going well, observe what is going wrong and do that less. Then, observe what you do well and do that more. Meanwhile, continue to seek out and perfect an edge based on some very minor variable that these randomness equations don't consider and learn to exploit it. Remember, small meaningless variables in chaos theory generally lead to multi-billion dollar insurance claims on the coasts of Florida and South / North Carolina.
    #29     Oct 15, 2002
  10. DT-waw


    "There is a time to apply meticulous and rigorous science and a time to apply art. There is a time to focus on strict logic and a time to rely on "fuzzy logic."

    "Everything in life requires balance."

    "Remember, small meaningless variables in chaos theory generally lead to multi-billion dollar insurance claims on the coasts of Florida and South / North Carolina."

    Good points, aphie. Congratulations, you've just hit #1000!
    #30     Oct 15, 2002