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Random Line Theory
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Random Line Theory

  #291 (permalink)
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bobwest View Post
This is different, though. These lines don't have any edge at all.

Yes, your right. If you backtested random lines they would have no edge at all. But a presumably well thought out trading method with real s/r lines may end up with a 55% or whatever probability but not 75%+ which is what most novice traders are expecting. The market does not hand out high probabilities that easily. The lines give traders the illusion of causality that never really pans out fully.

That is why I have gotten away from using trendlines and S/R to a large extend. There are too many shenanigans that go on in the ES with failures and traps to make them really useful and I really hate drawing them. I only use swing trendlines which are usually good for only one or two touches at most.


Last edited by Seahn; February 23rd, 2015 at 04:06 PM.
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  #292 (permalink)
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bobwest View Post
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.

Yes, and for the new posters to say they understand that random lines don't have significance (well, a couple even tried to say they did!) but that "their lines", their 'xyz' indicator, did have significance... well, they've missed the point entirely.

I do hope it helps some people though. I firmly believe you can only help those that are ready and able to accept the help, it cannot be forced.

Mike

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  #293 (permalink)
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Paradolia


Paradolia is the tenancy of Humans, and presumably other creatures, to see patterns in sequences of events. It has survival value, but can lead to superstitions or pulling random patterns into a piture of Jesus on a piece of toast. For trading I know not all things are random because there are certain consistently profitable traders on a large number of trades that makes their performance by chance unlikely.

Also, there are indicators like the random walk indicator that can be employed. I can think of better ones for screening out non random movement based on a normal distribution, etc. Also, there are outside forces that prevent markets from being truly random - I.E. economic reports for indexes, and for commodities, comparable cost to substitutes such as the relatve cost to a farmer for protein in corn or soymeal and the relative cost to grow one or the other.

On a short term basis that I focus on now, these have less impact. Human behavior does have predictability - see any group psych text. Similar to the psychohistory out of Asimov, large groups can have statistically predictable behavior.

Finding and predicting this required refining a pattern to an objective definition and testing it for predictive power. Then discipline to avoid trading various good looking but untested patterns, or extending stops just another tick to see if the trade turns around instead of sticking to tested numbers.

Then of course there is the truth that many patterns rotate in predictive value because when the use of them becomes widespread, it forces prices to move away from them - I.E many seasonal trades continue to move back around the calendar and more people jump on and catching them before the move required earlier and earlier entries, or breakout systems were doing very well a couple months ago, but not the intraday markets seem to like range trading better, just a tick or two breakout and reverse.

So while there are non randomand random patterns, it is necessary to ignore instinct and test objectively before putting money on one.

Jim

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  #294 (permalink)
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rmejia View Post

Excellent.
I bet he got some flame mail after that.

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  #295 (permalink)
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Big Mike View Post
I do hope it helps some people though. I firmly believe you can only help those that are ready and able to accept the help, it cannot be forced.

Mike

Great experiment/exercise!

Personally, I think the ones that will benefit the most from practising this exercise are the ones that have the most doubt with this theory.

Unfortunately as Big Mike put it, its a dilemma and the learning process cant be forced.

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  #296 (permalink)
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Random Lines, but non-random behavior

The instrument that I trade exhibits extremely repeatable behaviors. It took me five years to begin to understand those behaviors and I believe that they are most likely resultant of software algorithms--it is simply not conceivable that the price action could behave as it does in fast-paced trading at small time frames without being algorithm-driven. At the same time, the fractal nature of the moves indicates that larger time frame players are using the same levels to take action.

Reactions at support / resistance and trend lines are self-fulfilling to a degree, but are not the governing factor in the instrument that I trade. So, in that sense, the lines at which reversals occur could well appear random. My worry for the past year has been that the learning I have taken from the market over the past years will change in some fundamental way--rendering my approach less effective. My take is that apparently random lines are anything but random. You have to untangle the driver of price reversals on your trading time frame and realize that the lines are a result and not the cause.


Last edited by PDQuig; February 24th, 2015 at 12:57 PM.
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  #297 (permalink)
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But lines always help to find additional entry signals....

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  #298 (permalink)
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Why is the market tradable profitably?


Tap In View Post
[...]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.

I am with Tap In. If two buddies take a look at the same volume profiles of some days they might identify very different levels based on how the past histograms overlap.

A possible proof-of-concept came to my mind. If random lines can possibly work great then random trades also should do.

Experiment:
Open a trade
  • on an active market
  • in the regular trading hours
  • at random times (say 3 times per session, skipping the lunch period)
  • in a random direction
  • set a 1:3 risk/reward for example
  • and let the trade run until stop-out or win

It could be an interesting experiment whether 1:2..10 performs better over a longer time period.


In theory the market is tradable profitably only because of the up and down moves and distances are
  • not fitting in the normal distribution ("coin tossing" - an equal chance of up or down, meaning that it is statistically impossible to accumulate profit)
  • and also do not spread over a low standard deviation (no significant moves)
A SD of 2 may hold 97%+ of all moves. But the markets occassionally make moves over 5 or even 20 standard deviation (eg. in 2008).
This makes the shift to big wins with low risks, outweighing losses in periods when markets move not much.
(I am not a math scientist so please forgive me if the explanation is not precise in every way.)

At this point I think you might consider reading after
Trade well!

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  #299 (permalink)
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gtrader62 View Post
The post proves what it was meant to... behavior is predetermined by perception and associations of learned behavior.

As Dr. Van Tharp phrased in a book "You don't trade the markets, you trade your beliefs about the markets"
--Trading Beyond the Matrix: The Red Pill for Traders and Investors By Van K. Tharp

This thread may try to leave behind any and all resoning or beliefs. But this approach is only possible with math and statistical methods. Or let a monkey to push the buttons

I think we need to decide where do we want to go from here..
  • Discuss trading based on the perception of random lines which is clearly possible though the result cannot be closely related to the randomness but maybe more to the pattern recognition capability of the brain.
  • Or discuss random or semi-random trading which is only related to the market's measurable statistical parameters (for example skalping HFT algos used to rely on this, afaik).

My two cents..

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  #300 (permalink)
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3rd prarty proof


I suppose the best way to see if a support level is "real" in real time is if there are a stack of limit orders on the DOM under it and if the down volume runs up at that level without being able to exhaust the orders coming in, so it does not break through that support tick level shown on the DOM or similar order flow sources.

I have never been sure enough to trade on the "support becomes resistance"idea unless I see it really behaving as resistance - test of the new level.

Jim

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