The market is random

dtrader98 · Oct 5, 2009

Quote from nitro:

I agree and this is clearly correct, but I don't know why people find this to be some sort of revelation.

This stuff goes under the heading of seperating signal from noise, and what is signal to one, is noise to another. Let me give an example. Take a typical music CD. Say you gave it to someone who had never seen one or does not understand what it is. He may be able to somehow look at the data stored on it, run statistical tests, etc, and he will be completely dumbfounded by it and decide to use it as a freesbie. I come along, put the CD in a CD player, and wham, out comes music that has nearly 100% structure!

The point is that 99% of trading is seperating signal from noise. When you finally have the market equivalent of the "CD player", markets no longer look random.
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Sort of like the 'aha' moment you get when you see how an SVM takes 2D data
(that does not appear linearly separable) and moves it to higher dimensions.
Clearly a revelation for most who get it, and it doesn't require subjective, obfuscated voodoo visionary crap to see either. 100% objective.

piezoe · Oct 5, 2009

Quote from college_trad3r:

What I have realized in the past weeks is that the market is truly random. It has been an epiphany. I dreamt about this at first. I was scared: what if the market is truly random? What if all the effort you put in can come unrewarded? I expounded on this idea and came up with the following: that the market is truly random.

What this means is that there is no winning trading strategy. ...

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I'm cooking a picnic ham at the moment but thought I would just interject here that if your definition of "random" is that the market has been jerking you around lately, why not just come out and say so. Then we can all agree; according to your definition the market is random.

I might add that in statistics the term random has a rather specific meaning depending on context -- so i suppose that in the context of stock market random can have the meaning "its jerking me around and i can't figure it out."

P.S. I simcerely hope this is not another of my thread destroying posts.

wutang · Oct 5, 2009

Quote from dtrader98:

I actually gave a never before published (to my knowledge) mechanical edge away in the Bar by Bar thread. The purpose was to help Swan Noir, and the argument was to show how commissions swamp out small net positive edges over time. Although, 1) You could increase position size if you can afford it, and swamp out the negative commission bias. 2) It gives you an idea of how a mechanical trader might think.

If anyone were to run a standard 'test' for randomness on the raw data, it would qualify as random, yet the expectations results I showed had a non-random edge over the data points. The idea is that a set of data can be perfectly random from a statistical point of view, but it is possible to process it in such a way, that the overall expectation with large numbers is better than chance. Of course slippage and commissions can and will work against you if you are under-capitalized.

Now that I described it as an edge, I guess everyone will run over to look (even though the original intent was to point out pitfalls). Unfortunately, most here want the fish, but don't want to learn how to fish. I've offered plenty of collaborative opportunities to discover things in the past, and yet, virtually no one wants to do any work to learn. Go figure.

P.S. I'm not a fan of Bar by Bar, for the record (not that it matters much), but I respect the author for publishing a book.
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I do actually have that thread bookmarked for your discussion with Swan, and I plan on reading back through your post history. I've found that the best way to learn anything on this forum. Read back through the history of those who seem credible until you find something that is either helpful or reveals them to be as clueless as myself.

I'm not interested in your fish. I'd like to learn how to catch my own. The current game plan is to school my self on probability and stats, learn how to program models in excel, eventually learn some other programming language(s), money/risk management, ins and outs of exchanges/order routing, and maintain a healthy dose of skepticism and humility. I figure with those building blocks I'll at least be able to better filter out the noise of most information on trading and maybe begin construct hypothetical strategies (which I'll be able to test!) of my own. Thanks for the response. It is appreciated.

crgarcia · Oct 5, 2009

Quote from FB123:

It's funny how we never hear consistently profitable traders expounding this random market theory, isn't it?
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There are no "consistently profitable traders".
Not in the long run.

Those who profited by luck alone, won't make it in the long run.

crgarcia · Oct 5, 2009

Quote from college_trad3r:

What I have realized in the past weeks is that the market is truly random. It has been an epiphany. I dreamt about this at first. I was scared: what if the market is truly random? What if all the effort you put in can come unrewarded? I expounded on this idea and came up with the following: that the market is truly random.

What this means is that there is no winning trading strategy.

You might think, how is this possible? Well it is, because the way people make money is 100% by luck. The luck decides whether your strategy will be profitable for a few years, before the market changes. Each year there are different strategies that work, because of luck.
You might think then how did Buffet made his money? Pure luck! He is an outlier of statistics. Just like the 1% out of traders who are consistently profitable, they are profitable by luck! It is only by chance their strategies seem to work. :eek:

Now, is it possible to put luck in your favor? YES IT IS. By testing out alot of different strategies you can come up with one that seems to work. It is your job to exploit it until your luck changes. However finding strategies that work is mostly dependent on luck. You might dabble with price action strategies, and find out they don't work this year, though they might be the best strategy around in the long run.
Trading is more about luck than hard work It is not a meritocracy that people think it is. Most people ignore this cold hard fact.

This is the hard and pure truth i have finally uncovered about the markets. See what you will do about it. I can only give you the tools but you have to do the fishing yourself.
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You are on the right track.

Even if not random, markets are too complex for anyone (or any computer) to predict.

Read Fooled by Randomness by Taleb Nassim.

jodistrict · Oct 5, 2009

The markets are not only random but much more random then the relatively tame normal distribution. When you think of it for a moment, trading has to be difficult, because if it were easy anyone could do it and there would be nobody left to do the work necessary to run a society. If trading was as easy as the commercials tell you, the government would have to change the rules to protect the scarcity of money. Traders provide a service to the marketplace, i.e. liquidity. You are working but you are not guaranteed payment for your services. One suggestion I havenât heard yet to get around the randomness problem is âtradingâ. Investors have to be right to make money, but traders can make money trading. A trader can develop strategies that donât require being right all the time, such as being market neutral, and using some kind of hedging technique.

Mr. Miyagi · Oct 5, 2009

When I first began trading I didn't study technical analysis. I met a trader who taught me that this was the only way to find order in the markets. Two years later, it has steadily become clearer. You begin to see the small nuances that guide you. Learned only by staring at the charts day after day. It is all in the charts, Start with large time frames... Daily and down to the 3 minute chart. I lost 20k in my first two years trading.. paid my tuition, now I have my 2 year Master's degree in technical analysis, and have become consistantly profitable. Just have patients Daniel-san

piezoe · Oct 5, 2009

Quote from jodistrict:

The markets are not only random but much more random then the relatively tame normal distribution. When you think of it for a moment, trading has to be difficult, because if it were easy anyone could do it and there would be nobody left to do the work necessary to run a society. If trading was as easy as the commercials tell you, the government would have to change the rules to protect the scarcity of money. Traders provide a service to the marketplace, i.e. liquidity. You are working but you are not guaranteed payment for your services. One suggestion I havenât heard yet to get around the randomness problem is âtradingâ. Investors have to be right to make money, but traders can make money trading. A trader can develop strategies that donât require being right all the time, such as being market neutral, and using some kind of hedging technique.
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The "normal distribution" is not random. In the statistical sense associated with the normal distribution defined by Gausses equation, "random" means that observations, from which the parameters of the normal distribution will be estimated, are made in random order. The distribution itself is not random.

By the way, the ham came out great.

FB123 · Oct 5, 2009

Quote from crgarcia:

There are no "consistently profitable traders".
Not in the long run.

Those who profited by luck alone, won't make it in the long run.
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This statement reveals your lack of understanding of even high-school level statistics, and you have no idea how much every successful trader is laughing at you right now.

I'm sure it makes you feel better as a failed trader that their success is all due to luck though. You keep on living in dream-land my friend, it's no skin off my nose.

sakhter · Oct 5, 2009

Quote from college_trad3r:

What I have realized in the past weeks is that the market is truly random. It has been an epiphany. I dreamt about this at first. I was scared: what if the market is truly random? What if all the effort you put in can come unrewarded? I expounded on this idea and came up with the following: that the market is truly random.

What this means is that there is no winning trading strategy.

You might think, how is this possible? Well it is, because the way people make money is 100% by luck. The luck decides whether your strategy will be profitable for a few years, before the market changes. Each year there are different strategies that work, because of luck.
You might think then how did Buffet made his money? Pure luck! He is an outlier of statistics. Just like the 1% out of traders who are consistently profitable, they are profitable by luck! It is only by chance their strategies seem to work. :eek:

Now, is it possible to put luck in your favor? YES IT IS. By testing out alot of different strategies you can come up with one that seems to work. It is your job to exploit it until your luck changes. However finding strategies that work is mostly dependent on luck. You might dabble with price action strategies, and find out they don't work this year, though they might be the best strategy around in the long run.
Trading is more about luck than hard work It is not a meritocracy that people think it is. Most people ignore this cold hard fact.

This is the hard and pure truth i have finally uncovered about the markets. See what you will do about it. I can only give you the tools but you have to do the fishing yourself.
More...

Market is not random & luck has nothing to do with it. For some reason you are jaded. Is it because you do not have a winning strategy?

seems so.