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Random Line Theory


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Random Line Theory

  #21 (permalink)
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Here is after the close, day 1 random lines.

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  #22 (permalink)
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For day #2, I used a random number generator:
RANDOM.ORG - True Random Number Service

On the right, I just plugged in low and high (like 8800 and 9300) and then plotted the lines based on its output.

Here are the lines for day #2. These are prior to the open. Will update either during the day or after the close. These lines are 100% random, there is no chance I was "influenced" this time by logical levels.

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  #23 (permalink)
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Big Mike View Post
For day #2, I used a random number generator:
RANDOM.ORG - True Random Number Service

On the right, I just plugged in low and high (like 8800 and 9300) and then plotted the lines based on its output.

Here are the lines for day #2. These are prior to the open. Will update either during the day or after the close. These lines are 100% random, there is no chance I was "influenced" this time by logical levels.

Mike

Hi Mike,

I think that it is clear what you want to demonstrate and I agree. Our brain is hardwired for pattern recognition, and even when there is no pattern it will complete the picture to produce an analysis that shows some regularities.

However, by your demonstration, you do violate the law of large numbers. You need to repeat the process at least a hundred times to draw any conclusions, and I doubt that any of the members of the forum will support the pain to evaluate 100 charts with random lines.

Your first random chart, as it contains random lines, may well have lines that are not random at all. But let us have a look at your lines

92.21, 91.53, 90.29 -> out of range, not hit

90.73 -> although it looks like it acted as support (brain wash), price ignored this line and went down to 90.51. 90.51 however was a logical support level close to prior day's low, which was at 90.48. The fact that the bulls stepped in above prior day's low is a clear bullish signal.

91.27 -> this random level correctly predicted the high of the day LOL. Did you ask an old woman with a crystal ball, or was it by chance that one of your 5 levels chosen finally made it?

By observation I have noticed that some levels are used as exits which creates a first price reaction. The second approach sees an overshooting of price (bull trap or bear trap) before price reverses. In general, it is the first high or low that defines the support or resistance. In this case the first high was at 91.24 and the second high at 91.28. I actually had shorted the first high, because it was 50% retracement from the day's high in confluence with the main pivot, both at 91.21, so this random level fell together with a non-random level that works.

Random levels become tradeable levels, if there is a sufficiently large number of traders that uses them. Technical Analysis is a pseudo-science that mostly relies on self-fulfilling prophecy. In a way it is similar to the Keynesian beauty contest. You do not select the girl (S/R level) which is most beautiful, but the girl of which you think that the other agents think that all agent will think (n recursions -> find convergence level) that it is the most beautiful girl. This is subject to fads, so technical analysis means identifying the current fads that work.

I know that it was not your intention to discuss these levels, but just to show that our brains that have been hardwired by evolution, will trick us into pattern recognition and attribute a meaning to something which is meaningless. There is a number of cognitive biases related to this, including Clustering Illusion and Illusory Correlation.


Clustering Illusion

This is the tendency to erroneously perceive small random data samples as containing significant information, caused by a human tendency to underestimate the amount of variability that can appear in a small sample of random data. I remember that question about the birthday: If you have 25 randomly selected people invited for a party, what is the likelyhood that two of them have them have the same birthday (day of year)? The correct answer is 56.87%. It is actually more likely that there are at least two of them having the same birthday than otherwise. There is another study about basket ball players that shoot successfully in streaks - called the hot hand phenomenon. The so called hot hand however is a fallacy based on clustering illusion. It simply does not exist, as was shown by Gilovich, Vallone and Tversky.

clustering illusion - The Skeptic's Dictionary - Skepdic.com


Illusory Correlation

Illusory Correlation

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  #24 (permalink)
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So far today, the random lines have predicted the opening price within 1 tick and the 30m opening range high/low within 1 tick.

I hope you guys do understand what I am trying to do here... we rationalize lines on a chart after-the-fact, that is what I am doing here, assigning value to them.

Mike

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  #25 (permalink)
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Big Mike View Post
So far today, the random lines have predicted the opening price within 1 tick and the 30m opening range high/low within 1 tick.

I hope you guys do understand what I am trying to do here... we rationalize lines on a chart after-the-fact, that is what I am doing here, assigning value to them.

Mike

i think most 'guys' understand what you are trying to prove, ie, rationalize lines on a chart after-the-fact. But what are you going to do with this information ? How are you going to transform this information into actionable knowledge ? Are you gonna eliminate all lines on your chart ? No more support/resistance or diagonal trend lines on your chart ? No more channel ?

Do you consider the CCIPivot line projection you use on your chart in the same league as random lines ? Are you giving more weight to these lines ?

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here is before the fact

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  #27 (permalink)
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trendisyourfriend View Post
i think most 'guys' understand what you are trying to prove, ie, rationalize lines on a chart after-the-fact. But what are you going to do with this information ? How are you going to transform this information into actionable knowledge ? Are you gonna eliminate all lines on your chart ? No more support/resistance or diagonal trend lines on your chart ? No more channel ?

Do you consider the CCIPivot line projection you use on your chart in the same league as random lines ? Are you giving more weight to these lines ?

I have zero intention of trying to make random lines useful.

What I am trying/attempting to demonstrate is the rationalization of lines on a chart. Some people attempt to assign value to these lines after-the-fact. So, now knowing the lines I have generated are random, and yet I can still easily assign the same values that someone would assign a non-random line, what does that tell you?

BTW, no I do not consider CCI Pivot random nor do I consider pivot points random. I do give them more weight than a random line. However, I firmly believe I give them much less weight (much, much, much less) than most traders who eagerly download them and place them on their chart, who then believe they have found an edge.

So to that point, I use the CCI Pivot as a way to frame the price, just like a moving average or etc. But I used to think differently. I used to think "only short when MA is down" and etc. In fact I still catch myself with those thoughts, and while I do firmly believe in trading with the trend, I don't think you can assign a black/white hard/fast rule to any indicator, even a simple moving average and a rule such as trade short when falling and long when rising.

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  #28 (permalink)
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So now price came down and attempted to test the 90.88 marker, coming within 5 ticks before reversing and re-testing the 91.35 line.

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  #29 (permalink)
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Here we can clearly see that at first the line acted as resistance. But once the line was broken, resistance became support.

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  #30 (permalink)
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What is interesting about this is it is food for thought about how ill defined most setups are that you read about.
Consider with these 5 lines, candle body/wick and no defined number of ticks for how close price needs to come to a line to have meaning..you basically have the entire chart area practically covered no matter where price goes without a massive trend.
On the other hand with tens of thousands of ticks per day, each being a potential trade you could be entering or exiting, a random line I would imagine is still better than nothing if only to act as a random filter.

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