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Random Line Theory
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Random Line Theory

  #281 (permalink)
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I might be missing something here and I apologize if this was brought up before, but isn't it possible that randomly generated lines placed on a chart might, by chance, also coincide with lines that a skilled chartist might place on the chart via market profile, previous S/R, etc? And so, though the line was generated randomly, it is actually coincidentally in a location where a price reaction was already predictable to a certain degree.

If one didn't know better they might say, "look, price is reacting to a line that was randomly generated. How funny." When in fact, if deliberately placed lines based on skilled analysis were then superimposed on the chart the random line may be in the very locations as the deliberate lines. Meaning, that price is actually reacting in a location that could be predicted by one who knows what they are doing, while the location of the random line was just "lucky".

A more interesting experiment would be for a skilled chartist to place his lines on the chart in one color, while randomly generated lines were placed on the chart in another color. Then analyze which lines produced the most definitive and/or significant reactions.

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  #282 (permalink)
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A more interesting experiment would be for a skilled chartist to place his lines on the chart in one color, while randomly generated lines were placed on the chart in another color. Then analyze which lines produced the most definitive and/or significant reactions.

It would require a large number of samples because even for a skilled chartist it is a probabilities game. The probability of price reacting where a line is drawn by a skilled chartist should be greater than having price react to a random line.

The other thing is how a trader manages a trade. What risk is he willing to take for what reward? Where does he enter? Where are his exits? What does price have to do to trigger a trade.

It is hard to find the Truth when you start your search with a preconceived notion of what the Truth will be.
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  #283 (permalink)
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I might be missing something here and I apologize if this was brought up before, but isn't it possible that randomly generated lines placed on a chart might, by chance, also coincide with lines that a skilled chartist might place on the chart via market profile, previous S/R, etc? And so, though the line was generated randomly, it is actually coincidentally in a location where a price reaction was already predictable to a certain degree.

If one didn't know better they might say, "look, price is reacting to a line that was randomly generated. How funny." When in fact, if deliberately placed lines based on skilled analysis were then superimposed on the chart the random line may be in the very locations as the deliberate lines. Meaning, that price is actually reacting in a location that could be predicted by one who knows what they are doing, while the location of the random line was just "lucky".

A more interesting experiment would be for a skilled chartist to place his lines on the chart in one color, while randomly generated lines were placed on the chart in another color. Then analyze which lines produced the most definitive and/or significant reactions.

Sure, that's entirely possible.

However, since there is literally no rhyme or reason to the random lines -- they are placed at levels chosen by a random number generator -- they could be placed anywhere else, too. Since they are just thrown on there, they really are not producing any reactions, significant or otherwise. They look like they do, but that is how we see it in hindsight. It would be extremely dangerous to your financial health to try to trade these lines in real time, when you couldn't already see the outcome, and therefore know which ones "worked" and which ones did not. None of them actually worked; they just sometimes look like they did, in the selective vision of hindsight.

I get what you're saying, though, and sure, sometimes the random stuff will match up with the real (or at least deliberate) stuff. And if the real stuff worked, then it would appear that the random stuff did, too. The real point, though, is that the random lines really only seem to work, because we look at them and say, "Yep, that's support there, all right, and over here, that's resistance." But that interpretation is in us -- the (random) lines aren't doing anything.

How about the deliberate ones? Are they doing anything? Perhaps... I don't see why not. The point is not that the lines, or other indications provided by whatever method a person likes, are the same as the purely random ones. The point is that part of our identification of a pattern is in us, not in the lines -- for the random lines, it's entirely in us, because there is no pattern; for a different line, the pattern might be objectively there, or not, but there is still a mental process that identifies it for us, and that recognition is what the experiment is about.

More simply, some of it is in the trader, not in the chart. Even when the indications on the chart are entirely valid and are a workable way to trade.

Now, for a trader, this puts a very high level of responsibility on him, rather than on this or that special method. Or at least, that's how it seems to me.

It also explains very handily why there are so many methods out there, completely different from each other, that some people are actually using profitably, while other people keep trying to use them and keep failing. It's not always (perhaps never) just the method.

Bob.

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  #284 (permalink)
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Thank you Mike, Fat Tails, BobWest, and others for some very interesting discussion.

On the subject of placing random lines on a chart, this has me thinking of the likelihood that where you place your lines, and where I place my lines, has less to do with your or my making money than all the other parameters that we use to manage the trade (this has been mentioned multiple times - so nothing new here).

I think a very interesting exercise would be to select three traders - a total beginner, a person who has traded a couple of years and made money, and someone who is very seasoned and has a long term history of consistently making money using multiple timeframes and multiple instruments. Using only the random lines on the chart (or any method of generating a line for that matter - I do not think it will matter) force each trader to enter a trade the second that price crosses this line. The trader gets to select the direction (Long/Short), and they are responsible for the trade mgmt. My opinion would be that even when using random lines or non-random lines, the results would pretty much match the person - the beginner would lose the money in his/her account, the middle guy would either lose a little, break even, or make a little, and the very seasoned person would end up making money, no matter how the lines were generated.

If this exercise does not suit your fancy, another would be to take two people, one a novice and one a seasoned trading veteran with a good track record, and make the two traders take opposite trades at the exact moment price crosses a random (or any other) line. Better yet, always let the beginner pick his/her trade direction, forcing the seasoned person to take the opposite trade. I think once again, the results would be the beginner loses the money in his/her account, and the seasoned trader makes money.

I am not sure if this type of experiment has been done before with real money (which makes all the difference in the world), but it would allow one to focus not so much on the lines (random or not) we place on the chart, but to focus more on the trade mgmt instead.

Just a thought....

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kayaktri View Post
Thank you Mike, Fat Tails, BobWest, and others for some very interesting discussion.

On the subject of placing random lines on a chart, this has me thinking of the likelihood that where you place your lines, and where I place my lines, has less to do with your or my making money than all the other parameters that we use to manage the trade (this has been mentioned multiple times - so nothing new here).

I think a very interesting exercise would be to select three traders - a total beginner, a person who has traded a couple of years and made money, and someone who is very seasoned and has a long term history of consistently making money using multiple timeframes and multiple instruments. Using only the random lines on the chart (or any method of generating a line for that matter - I do not think it will matter) force each trader to enter a trade the second that price crosses this line. The trader gets to select the direction (Long/Short), and they are responsible for the trade mgmt. My opinion would be that even when using random lines or non-random lines, the results would pretty much match the person - the beginner would lose the money in his/her account, the middle guy would either lose a little, break even, or make a little, and the very seasoned person would end up making money, no matter how the lines were generated.

If this exercise does not suit your fancy, another would be to take two people, one a novice and one a seasoned trading veteran with a good track record, and make the two traders take opposite trades at the exact moment price crosses a random (or any other) line. Better yet, always let the beginner pick his/her trade direction, forcing the seasoned person to take the opposite trade. I think once again, the results would be the beginner loses the money in his/her account, and the seasoned trader makes money.

I am not sure if this type of experiment has been done before with real money (which makes all the difference in the world), but it would allow one to focus not so much on the lines (random or not) we place on the chart, but to focus more on the trade mgmt instead.

Just a thought....

I think that Linda Raschke did something like that at one point: asked people in her chat room to take a particular side of a trade and then report what happened. I don't remember the details, and I'm too lazy to look it up.... I believe that managing the trade was the point she was getting at, though.

I think trade management can be a big piece of any trading success or failure. However, so can trade selection: the best thing to do if you're short in a strong uptrend with no pullbacks is to just take a loss quickly; not too much opportunity for management other than that. Of course, over time that is what a more skilled trader would do, and wait for better situations, so that doesn't settle the question.

I would say that there are many, many ways of trading that will work, for different people, and many that won't, for whatever reasons. Taking the focus off the chart or method and putting it onto the trader and what he/she does with it is one of the things that this Random Line stuff does, at least for me.

Bob.

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  #286 (permalink)
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Apologies if this has been discussed, I have not read the entire thread yet.

As a student of Brooks price action, I am not at all surprised the market appears to react to random lines. The market is always hovering around a 50% probability (read "random") of any outcome (except for long term equities which have an upward bias). Generally there is a range of 40-60% for price moving a certain way. The more reward a trader is trying to achieve, the lower the probability of a favorable outcome. Only relatively rarely does the market have 70%+ probability of a certain outcome, such as spike breakouts.

This is the way it must be in a free auction market because if the outcome was guaranteed no one would take the other side of the trade. The edges are small in trading for a reason.

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  #287 (permalink)
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Seahn View Post
Apologies if this has been discussed, I have not read the entire thread yet.

As a student of Brooks price action, I am not at all surprised the market appears to react to random lines. The market is always hovering around a 50% probability (read "random") of any outcome (except for long term equities which have an upward bias). Generally there is a range of 40-60% for price moving a certain way. The more reward a trader is trying to achieve, the lower the probability of a favorable outcome. Only relatively rarely does the market have 70%+ probability of a certain outcome, such as spike breakouts.

This is the way it must be in a free auction market because if the outcome was guaranteed no one would take the other side of the trade. The edges are small in trading for a reason.

That's a good point. The edges get crushed because there's always buyers/sellers on the other side, and opportunities are evened out. So it's hard for even a good method to be better than 50-50.

This is different, though. These lines don't have any edge at all. They are just tossed onto the chart, and then when we look at the chart, we think we see an edge that isn't there, and that's really only in hindsight. If we tried to trade them, it would be a disaster. (It may also be true that some particular system -- or most of them -- do no better; but that is a different question. ) But there's no one else looking at our random line and taking the other side; no one else sees that line at all.

So the lesson (or it is for me) is to notice that we attribute a meaning and pattern even where there is no pattern. Being aware of that tendency in the random case makes me more aware of it when I'm using something that is not random, in the same sense that these lines are. The trade may work, and the meaning may in fact be there, but there's a part of it that's as much in me as in the chart.

Bob.

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  #288 (permalink)
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bobwest View Post
So the lesson (or it is for me) is to notice that we attribute a meaning and pattern even where there is no pattern.

Bob, maybe you begin to feel my pain now when trying to share my thoughts about this concept...

Mike

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  #289 (permalink)
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Bob, maybe you begin to feel my pain now when trying to share my thoughts about this concept...

Mike

Yes. Over the weekend I began to feel very burned out on Random Line Theory, responding to the many posts that were made on it.

However, it is not an easy concept to get, and people are really trying to grapple with it, so on balance it has been worth it.

It does tend to burn you out, though.

Bob.

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Bob, maybe you begin to feel my pain now when trying to share my thoughts about this concept...

Mike

I learned this lesson (the very hard way) long before I started trading...and it was dramatic, hands down the hardest period in my life (and I say period because the transition took nearly 2 years).

When you start to "tunnel yourself" in your patterns (things you see that maybe aren't there and probably don't have the meaning that you're attributing to them), and someone / something breaks them, you find yourself empty because you literally lose meaning. I think that's why some traders could get "nervous" in front of this thread; we're unintentionally "trying to destroy their world".

I was probably totally incomprehensible, sorry for that

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