Stocks are random variables

Discussion in 'Trading' started by WallStGolfer31, Jan 25, 2007.

  1. WallStGolfer31

    WallStGolfer31 Guest

    Why deny it?

    You can't predict the future with patterns on a chart, that's just absurd. You can't predict future prices by doing research based financial statements from the past, it's already priced in!
  2. Totally disagree. There are patterns that predict the future more than 50% of the time and that is all you need.
  3. you are either a troll, or astoundingly ignorant.

    efficient market theory is a pipe dream of academics (who couldn't trade their way out a bag).

    traders, who consistently make money - laugh at it

    (me included)

    you don't have to be able to "predict" price to trade

    you need to have an understanding of probability, and how to apply it.

    trading is about assessing what the market is DOING, and using setups that offer positive expectancy based on the current environment
  4. WallStGolfer31

    WallStGolfer31 Guest

    I've tossed a coin before and it has landed on heads 15 times in a row, what's your point?
  5. billdick


    It would seem to me that the random walk model, which has been confirmed by several studies seems to apply to most stocks if one is not concerned with short term variations. Charts seldom predict 6 or more months into the future.

    It also seems true to me that if a significant fraction of stock buyers believe in some predictive theory, such as charting, then it will have some validity just by "self fulfilling effects." For example, if 30% of all stockbuyers believe that stock with even number of letters in their ticker symbol will rise in value on even days and ones with odd number of letters in their symbol will rise on odd days, then that too will be observably true to some extent. But unlike charting, few could be persuaded to believe this theory, but a Christmas rally etc. is ok.

    Charting is sufficiently inexactly defined "science" so that when the prediction fails it is often possible in hindsight to see "why." This and fact charting is sufficiently complex enough for many can believe it for years, especially as by doing so it is partially true, even if only by the "self fullfilling effect." That can also be deigned and instead an explanation that charting is capturing some "group psychology" etc. can be rationally held.

    In some cases it is easy to show that fundamentals, completely unpredictable by charting or any other scheme (tea leaves anyone?), will drive the stock. For example, recently the results of Northfield labs large experiment with artificial blood became known. Despite being a better carrier of oxygen than real blood, safe in all prior studies, and less viscous than real blood, those you got it instead of the more standard saline solution died more frequently and the stock lost about 80% of it value in a couple of days. This is quite common with small early stage drug companies. They may soar or collapse when the results of a clinical test are "unblinded" etc. Charting is clearly useless even if many believe in it in these cases.
  6. go put your money in a mutual fund/index fund/etf already.
  7. laptop


    lets just say its getting more and more random

    thus harder to trade.

    soon my children, successful traders will be 1 in a freakin billion
  8. it's only getting harder to trade if you are using techniques that worked in the PAST and assuming that the market environment will continue to bless those setups/methodologies

    the market is cyclical in OH SO MANY WAYS (volatility, bull/bear, etc. etc.) and necessarily adapts, since the market is the aggregate of all traders decisions.

    part of having an edge is NOT using what everybody else is using, and simultaneously understanding HOW the average (loser) retail trader operates. if u know what the losertrader is doing, the correct thing to do is the opposite (usually)

    also, if u understand how institutions trade, how program trading works, etc. you can recognize its footprints and adjust your trading accordingly
  9. Charting is an interpretation. The market tosses you a Rosetta Stone and it's up to you to crack the code. Your chart indicators are translation tools only. Based on my past experiences the market is far from random. I've gone long stocks that show the patterns I'm looking for and within two weeks the company's up for sale and the stock is up 5 pts. I respectfully disagree with anyone who claims the market is random.

    there are many ways to gain an edge.

    personally, i use charts (and market profile) as well as many other things (market internals, correlated market's performance etc.). but charts are merely a tool to model price over time

    there is nothing magick about them

    as to the coin analogy earlier. first of all, n= far more than 15. i make dozens of trades a week and have made thousands of trades.

    so, while it is not incredbily unlikely for a coin to get heads 15 times in a row. it is (close to) statisitcally impossible when n>1000 (as an example), to show signficant positive expectancy if stocks were "random"

    stocks are not random because stocks move based on TRADER's DECISIONS.

    traders decisions can be chaotic, illogical, emotional, etc. but they are not RANDOM

    and again, as to the charting. i've made several investments (not so much trades) where i completely ignored the chart, because i found an edge elsewhere, that for that situation was more compelling.

    it's called "DD". do it. peter lynch wrote some great things about finding edge through field DD, and it is surprising how few people open their eyes to do it

    i've got a pretty extensive background in game theory, statistics, etc. and i can tell you that it may make you feel good to think the market is random , since then you didn't fail - the market failed you, but it is part of the reason why you are a losing trader - failure to honestly assess your faults

    not everybody can be a successful trader. if it was easy, and everyone could do it, it would cease to work (see: zero sum game - i trade futures, and they are zero sum)

    whether or not all information is currently known (which isn't true, but even if it was) and thus no edege is available there - that's clearly not the case, because the edge is in BETTER interpretation of the information known - industry specific expertise, or whatever. clearly, when stocks can move HUGE amounts with NO news or change in fundamentals, the idea that they are always "efficiently priced" is absurd.

    you need an edge. an ability to recognize some sort of situation where you have a statistical advantage in entering a trade. that's it. in a nutshell (and then you have to properly manage risk via position sizing, stops, etc.)

    losers will frequently try to blame others, or in the case of the market - the market itself - for THEIR failure.

    that's true in many sorts of human endeavours. why should trading be any different?

    the reality is that trading is competition with other traders, and people who want to blame others for their failings are setup for failure from the get-go.

    there is no more democratic institution on earth than an electronic order entry book.
    #10     Jan 25, 2007