Why do I see "Trends" in Randomly Generated Data?

Buying new highs or selling new lows is an example of "Breakout Trading" and a extemely remote form of antiquated technical analysis. I agree as well it is an inferior strategy.

Now that is laid to rest, we weren't talking about that.

If you can't "DEFINE" the trend then you can't use what it offers (which is simply to define the directional strength of a particular chart).

The "truth" is relative to your information set; Christopher Columbus, Ferdinand Magellan, Sir Alexander Fleming, Albert Einstein, Isaac Newton and James Van Allen are examples of individuals with unique points of view that discovered new information sets. Those around them that were closed minded to see the potential were the losers not Columbus, Magellan, Fleming, Einstein, Newton or Van Allen .

 

No matter how do you define the “TREND” the implications of your definition with regards to trading are the same. You want to guess as accurate as possible based on the observed data whether the market will go up or down. So what ever you used to define the trend will lead to two conclusions:

#1 I am in an “Up-Trend” therefore I believe it will continue to go up
#2 I am in an “Up-Trend” but I believe it is about to reverse.

The same things, of course you can say about the Down trend. But it is crucial to understand that at any given point of time the probability of the first two statements is still 50/50. Because if it was not, the Markets would not exist. The only reason for the markets to exist is to discover the most “fair” price of what ever is trading there. If the trend had any meaning at all the prices would then be predictable and, therefore the markets would destroy them selves. What I am simply saying that in the long run the outcome of any strategy that relies on Price vs. Time type of data is “0” minus spreads and commissions paid. In a short run the equity line might be positive (as any normal random walk) but it will with no doubts revert to “0” in the long run. In other words, using Price-Time data only (regardless of the type of indicators you run on it) is like driving the car only looking at your rear view mirror.

Answering, therefore, to the original observation “Why do we see trends in the purely random data?” brings everything home. The reason is our psychological necessity to associate the unknown with something that we can relate to. Any Shaman knows this trick very well. So, the answer is not in the patterns but in the reaction of people to them. And this info is available. Its too bad only few of us can see it!

 

I've found over the years that those that can't objectively define "Trend", as it relates to a specific charting enviroments, can't and most likely won't ever find the usefulness in it. They will always believe that any decision has no better than a 50/50 shot at being correct.

That is fine with me. It's too bad only a few of us can see that!

 

It’s not about "objectively defining the "Trend"; it's about believing that it has something to do with the upcoming events. No matter how you define things they objectively exist. You might say “I have noticed that if I click on my mouse with my middle finger (instead of my index finger) markets always go up! If you believe in that your brain will help you building this “ritual” and find all sorts of confirmations of you being right majority of the times. It’s called in psychology “positive imprint”. Once you start to believe in those things it is almost impossible to get rid of them. I sometimes sit on my toilet in the morning and look at my floor tiles. One of them has a stain spot that remarkably resembles a snake head. I cannot now look at those tiles without noticing this pattern. It, however, does not appear nothing like a snake to my wife, for example. I have been studying Mathematical Psychology and Behavioral Finance for almost 30 years now. I have developed numerous tests to show people their imprints. It’s mind bugling what people believe in!

 

I absolutely agree with imprinting and how it effects individuals especially in specific financial environments like trading but that has nothing to do with creating an objective rules set created on price oscillation extremes & occurances to define "Trend" and then testing it for years and finally follow it.

If you haven't seen how a specific and rigidly defined environment can benefit your personal trading or investing or believe it can be created then it is worthless discussing it.

 

If you believe that price movement is random then you obviously can't trade with any high level of confidence;but, you can still trade.
If you believe that price movement is not random you can trade with greater confidence.
Can you guarantee a winning trading career? Obviously not;but, you can trade in either situation. For me the choice would be in a non random situation since it is very difficult to win long term, if not impossible, if there is not an edge. I have yet to see a random generated price chart that included gaps.
Simply stated "Don't trade random events.".

 

Each individual can develop the set of rules that he/she is happy with in terms of succeeding in any type of intellectual activities. I do not deny at all the psychological importance of having a “plan” or “set of rules” or set of moral believes etc. Many people would live by religious rules and swear on their mother’s grave that their religion is the solo reason for their success. However, the objective question of the God’s existence would be iralavent to the fact that a set of beliefs plays an instrumental role in their lives. I don’t think that anybody can either prove or disprove the God’s existence simply because there is always an axiom in any given set of theorems that cannot be completely proven (Gödel's incompleteness theorems, http://en.wikipedia.org/wiki/Gödel's_incompleteness_theorem ). The reason I got into this discussion of trends was merely to show how our brain can play tricks on us and we would start to see “patterns” in the places where cannot possibly exist (including trends). However, it has nothing to do with one’s ability to make money in the markets.

 

My own bottom line: I think that people without inside information cannot reliably predict the future prices of financial markets. Therefore, I think that what sets some traders apart from the rest is their ability to better tune in to what is happening at the moment (in the context of their time frame) and to go with what is happening. I think that recent price action can give context to what is happening at the moment. It's hit and miss for everybody, but more so for some than others depending on the quality of their decision criteria. Further, I think that there is an inverse relationship between price/time prediction specificity and actual performance. Just my guess, of course.

 

I completely agree with this statement! Yes, I too believe that developing of sensible reaction to the market events is the key to success. I just hate when people attribute it to completely iralavent things (like watching trend). Trading markets successfully is an art form. There is a big difference between painting by numbers and painting!

 

Thanks, MAESTRO. Please note, however, that I added a sentence to my post. Specifically, that I think recent price action can give context to what is happening at the moment. Frankly, I can't imagine it being any other way.