Trend Following Research

That's the problem with charts. Noise traders simply put too much credence in charts---

It depends on your perspective, as you can see from the following-- traders cant tell random charts from stock charts.

ever seen a coin flip chart? same patterns as a chart stock



I promised Barron I wont post any live links to info, so here you go see below for source

co-worker has been day-trading for the last few months, and I’ve been teasing him about the negative average returns of day traders. (Day traders always think that they have a deterministic way to end up on the winning side of average.) Last week he gave some explanation for recent stock behavior, and I reminded him that stocks just follow a random walk and that he wouldn’t be able to tell a stock graph from a random walk. He told me that he absolutely would, and the challenge was on.
(I learned later that he thought I meant a truly random graph, where each day is a random number. I don’t know whether he would have taken the challenge had he known that I was referring to a random walk, which is a value that goes up or down by some random amount each day.)
He said that a six-month interval would be easiest to distinguish, so I went for 130 days, which is the number of weekdays in six months. I generated six graphs of random walks with 130 samples. I also chose six stocks off the top of my head, downloaded their history from Yahoo Finance, and for each one picked a random six-month interval. I then normalized all twelve graphs vertically.
The next day I gave him the twelve printouts and asked him to separate them into two piles: stocks and random. Other people got interested and gave it a shot. One person deliberately separated them randomly, without looking at the charts.
If done randomly, I would expect six of the twelve charts to be in the correct pile. In fact there’s a 43% chance of getting six right, out of twelve. There’s a 24% chance of getting four or eight right, 4% chance of getting two or ten, and a 0.1% chance of getting none or all twelve correct. (You’re always getting an even number right because every stock you think is random results in a random you think is a stock.)
Number right: 0 2 4 6 8 10 12
% probability: 0.1 3.9 24.3 43.3 24.3 3.9 0.1
We decided ahead of time that if he got ten or twelve right, he would be able to claim that stocks look different than a random walk. If he got four, six, or eight right, then either they look the same or he can’t tell the difference. If he got none or two, then they’re different but he’s got it backwards.
Here are the results. The day-trader is person V, who spent about ten minutes sorting the twelve charts. Persons W, X, and Y looked briefly at the charts. Person Z picked randomly without looking at the charts. The green and red colors represent correct and incorrect guesses, respectively.
Chart Symbol Person V Person W Person X Person Y Person Z Score
A Random Random Stock Stock Random Stock 2 of 5
B SWY Random Random Random Stock Random 1 of 5
C YHOO Stock Random Random Stock Random 2 of 5
D IBM Stock Random Random Random Stock 2 of 5
E Random Stock Stock Stock Stock Stock 0 of 5
F AIG Random Stock Stock Random Stock 3 of 5
G Random Stock Stock Stock Random Random 2 of 5
H CIT Random Random Random Stock Random 1 of 5
I Random Random Random Stock Random Stock 3 of 5
J Random Stock Stock Random Stock Random 2 of 5
K Random Stock Stock Stock Stock Random 1 of 5
L MMM Random Random Random Random Stock 1 of 5
Score 4 of 12 2 of 12 2 of 12 6 of 12 6 of 12
The person who picked randomly got half of them right, unsurprisingly. So did another person who looked at the charts

This is from ww.teamten com/lawrence/writings/are_stocks_a_random_walk.html

 

If stocks or any other markets just follow a random walk, then what is the point of entering at any particular time? And if market price behavior is truly random walk, then what would be the point of ever adding to positions, or even exiting at any particular time? Would not a random approach to trading be just as fitting as any other in the circumstances?

Nice to see you again, surf. I see you are still battling that same chip on your shoulder:

 

it's random in that it could go up or down ,but with a chart,you ask if it's going up or down ..to where...the chart tells you where

 

Narrowing down the gibberish to its core:

To follow and believe what this writer writes...you deserve to lose every last penny you have. In fact, it might be more exciting to take all of your money out of your accounts and light it on fire. If some bystander is reading his words in agreement and doesn't understand my severe condemnation, drop me an email. There is a reason that 2-3 of these folks exist only in ET.

 

Jack, you've certainly shown that you can't predict turning points:

 

I specifically asked about market returns, not about the visual look of stock charts. According to your theory, in any timeframe (daily, weekly, annually) market returns follow a random distribution.

If your theory was correct then the strong efficient market hypothesis would indeed correct and that in turn would mean that no trader could possibly beat a benchmark index such as the S&P500.

Do you believe markets are perfectly random and efficient? That is a brave statement considering this is a trading forum.

 

I disagree completely and believe that the above is a very very common misconception about how markets really work. efficient markets do not mean that no trader could possibly beat a benchmark such as the s&p 500. edges exist that can be exploited within the efficiency of the over all marketplace. These edges are short lived, but smart traders can and do find them for small time frames-- generally exploiting structural design flaws, such as use to exist between exchanges.

For those of us, without real information aka noise traders, to us the markets are random and efficient--but with good money management, I believe profits can be made despite the obvious efficiency of the market. However, without a real edge, luck and the old adage of cutting losses fast/letting profits run is all you really have.

Remember, its all perspective of the system--seeing it from your vantage point. If you have "market moving information"--the result isnt random, however most of us do not, therefore we are noise traders from our vantage point. Taking the chaos and squezing it into a framework doesn't make it any less random. That's a very expensive, time consuming delusion of many.

I have found that stepping outside of the typical (wrong) fractal idea of price can lead to insights previously unavailable.

Good Luck!

 

Correct. Without information or real edge, good money management is all we really have thus any entry is really just as good as any other. I believe Van Tharp cleary demonstrated this fact in one of his books....

 

Has anyone posted or cited something from an upper tiered peer reviewed journal (if so please re-post) or do y'all just use yingyang's blog posts to defend your positions?

Hershey kiss- if you reply to this please post <150 words

 

You're wrong.

You asserted markets were random and market returns mirror random coin flips. That implies a perfectly efficient and random market that doesn't allow any extraction of alpha. How can edges exist when market returns are perfectly random as you claimed? That is a blatant contradiction.

Either you have to retract your theory that market behavior can be modeled with coin flips or you have to admit that market benchmarks can't be beaten. You can't have both.