Was bored at my dayjob and started browsing Wikipedia - this is an excerpt from the Wiki article about randomness and a link to the Wiki article about emergence. I found it very interesting to read both of these articles within the context of markets/trading and thought i'd share: Randomness is an objective property. Nevertheless, what appears random to one observer may not appear random to another observer. Consider two observers of a sequence of bits, only one of which who has the cryptographic key needed to turn the sequence of bits into a readable message. The message is not random, but is for one of the observers unpredictable. One of the intriguing aspects of random processes is that it is hard to know whether the process is truly random. The observer can always suspect that there is some "key" that unlocks the message. This is one of the foundations of superstition. Under the cosmological hypothesis of determinism there is no randomness in the universe, only unpredictability. http://en.wikipedia.org/wiki/Emergence pace, ben
Like brain surgery or corporate litigation... It takes a certain level of expertise to understand randomness and other statistical concepts. I would roughly put that level... At post-graduate Masters math/stats... A very rarified space occupied solely by genius level math intellects. Experts at this level rarely have difficulty... Determining to what degree a system is random... Or which areas of the financial markets are random systems versus niches where inefficiencies exist. The problem with a place like ET and the day trading community... Is that otherwise rational people... Who would never, ever consider performing brain surgery or debating the finer points of corporate litigation... Have ** very strong beliefs ** about the markets and random systems and how to beat them... Even though they are ** not remotely qualified ** to understand what they are dealing with. This is a function of GREED... And 100 years of brainwashing by the securities industry... Which applies powerful mass manipulation techniques to the general public. There are endless historical examples... Where propaganda techiques have resulted in entire nations committing virtual suicide... Such as Nazi Germany or Mao's China or Stalin's Russia... Or today's Islamic Fascism that has brainwashed people into turning their children into "heroic" suicide bombers. The mass manipulation by the securities industry you see here... Is child's play compared to the above examples.
Twiga posted this link on WLD forum recently about Jim Simons President Renaissance Technologies, where Jim beleives that the advantage of having scientists create trading systems is that they are less likely to be fooled by randomness. http://www.turtletrader.com/trader-simons.html I agree that no sequence of events is truely random. But there are some aspects of a series that can make the "key" very hard to detect. Such as the amount and accuracy of available data. But the toughest aspect in trading system design are those of multiple keys, and constantly changing keys. Adding these together in decent measure can get you pretty close to true randomness, in fact it can be a tougher combination to deal with than true randomness because periods of non-randomness can conspire to have us think we have found rules that are stable when they are probably fleeting.
The idea of "scientists" building trading systems is misguided... That's like geting "scientists" to coach an NBA basketball team. There are plenty of experienced traders out there... With post-graduate Computer Science and Math/Stats degrees. I read the book "Emergence"... And it is one approach to ** explaining ** efficient markets... But I fail to see how one can use these concepts to then ** beat ** efficient markets. The one group I know about that is doing something related... Is Marketocracy.com where they have 1000s of traders ("ants") manage mini-portfolios... And then select the best performers to help manage their public funds. www.marketocracy.com But this is like hand picking the smartest, strongest (or luckiest) ants... Then killing off there rest... Not a mass of seeming "dumb" creatures... Building a more intelligent, organized entity as a ** by-product ** of their simple, individual labor. Anyway... good post... much to think about... There's gotta be a killer app in their somewhere
Don't get me wrong HoundDogOne, I'm not making any particular statement about scientists and capabilities in relation to trading. It was just an observation related to Ben's post. Though I do think it illustrates that a scientific or 'reasonable' attitude is absolutely required. I guess this comes down to ones definitions but I dont imagine that an efficient market can be beaten. A system that consistently beats the market then is evidence of some inefficiency. But of course the existence of that system necessarily means that no-one else can exploit that exact inefficiency, it has been made efficient.
The idea of an efficient market is a nice way to get a handle on the idea of how feedback is involved in the price selected by the market. It is not a truly descriptive term for any market nor does it rule out any patterns of volatility occuring that might be tradeable. People talk like markets are efficient =markets are untradeable and there is no link there, let alone causality. Another thing bothers me, other people say markets are random and the patterns we think we see are illusions. These guys are like conspiracy theory experts. They are in an area that nobody can disprove or will bother to, nobody that is trading the patterns is going to tell them everything about how to trade them, and if they do some "expert" will set up a badly designed backtest that proves the patterns fail anyhow. Randomness and efficient markets are opposing views almost, if I could add up all the vectors that create the efficient market price I can show that it is not random. It is all just intellectual superstition and people making hay off of the fact that traders don't readily want to prove what they can do nor do they want to disclose much, just like the CFR can't disclose anything new about what they are doing and cannot disprove the theories to anybody's satisfaction either.
Running some design of experiment studies on the market/stocks will always show that the market is not random. It only appears to be random because all pertinent data has not been factored into the equation, including the human one which still can be predicted to a high degree of certainty. "Charts don't lie people do"
This is a classic example of totally bullshitting unsophisticated people with meaningless $50 phrases: "design of experiment studies" proves something or other.. hey, it's a fact "human one" can be predicted "to a high degree of accuracy", hey it's a fact And finally... the single, stoopidest, most meaningless thing I have ever read on Elite Trader... "Charts don't lie... people do". These discussions always get reduced to this kind of crapola... That ** actually convinces ** Super Mooks to buy software and "systems" from these shysters. Bwa-ha-ha-ha-ha. This was supposed to be an intelligent discussion about "emergence" vis-a-vis "financial markets".