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Random Line Theory
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Random Line Theory

  #321 (permalink)
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So first and foremost, please ignore my reply unless you feel it has brought a new way of thinking about this topic. My reply here is chiming in only as a result of watching Adam's comments, and then Big Mike's comment as a related matter to another quantitative thread.

But let's start with the notion that any pivot point could be potentially construed as a level, and thus on any given chart you could potentially have 20-30 levels being drawn as a visual reference of where buyers and sellers might decide to engage in the market at the "best" possible price.

So which level will hold?

I think there is a big difference between saying a level is random versus levels are dynamic. And dynamic outcomes may give the illusion after the fact that they are random rather than that decisions in the market place are ever changing.

To me, levels are a reference point of where buyers and sellers have shown previous interest, not a guarantee of future interest. Let's take the EURUSD for example. We know that the 1.10 handle has been a big battle line draw in the sand. That 1.10 handle is a useful historical reference point set in stone, like an Enclopedia entry published in paper, set as an official record. But if the level is broken, does that mean the level was just "random", or that the reference point of what buyers/sellers thought of that fair price has changed?

By way of analogy, let's say we are talking about a poker hand in no limit Texas Hold'em. A players pocket aces may have a fixed statistical odds of winning, but the expected value also requires an analysis of how much money is on the table. If you're total bank roll is $100k, and you've made a 50% "trade" allocation betting $50k on the pot, and then suddenly $1M appears on the table, will you fold even though you might have a statistical edge? Maybe you run to the ATM and pony up the $1M difference, but then the opposing player piles on another $10M bet on the table. Do you run back out to the ATM again? Maybe you do in fact have a 75% odds of being the winner, but my next round of betting bringing in $1B to the bet squeezes you out of your conviction. The pocket aces are usually a good bet from a historical reference point of view, but the dynamic situation of how much money is on the table this time around changes that decision point. (And moreover, maybe I don't feel like betting $1B until I see you've raised to $100M making the bet worthwhile enough to put on the table)

I think this parallel plays out the same way in the markets. On the 4th/5th/nth time the level is revisited, you don't' know before hand if the price level will hold. It needs to be evaluated in real time gauging whether there are more buyers or sellers. However, that reference point knowing that sellers/buyers have previously defended that price is still useful, and a break of that defense is not randomness so much as it is a developing situation to be monitored.

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  #322 (permalink)
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I believe you missed the point. There is no evidence based in fact to support your hypothesis, there is only perhaps anecdotal evidence based on your perceptions. The reasons those aren't useful are laid out in this thread and are why I created random lines to illustrate how the mind perceives their usefulness

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  #323 (permalink)
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gtrader62 View Post
"Institutional traders are trained to manipulate novices. Especially HFT programmers...who hire chess masters and top poker players to learn strategies...to relate to human behavior.

Interesting thread. I recently started reading a book (nothing to do with trading). I have gone half through so far. It's IMO an introduction of what those guys teach how manipulate others. The book - "Cognition, 8th Edition by Margaret W. Matlin".
I was struggling at the beginning when reading then it went good.

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  #324 (permalink)
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Mind Games


Big Mike View Post
An hour in, and look how price has "bounced" off or is "respecting" one of the lines.

Within 2 ticks...

Mike

Well if the lines you drew were support and resistance lines then yah it might be relevant. But if youre just drawing some random line of where the stock might go youre BSing yourself. The HUman mind plays tricks on you by always trying to find patterns in everything in daily life, just like when you think you recognize someone's face at the supermarket but youve never seen them before!

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  #325 (permalink)
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anthony667 View Post
Well if the lines you drew were support and resistance lines then yah it might be relevant. But if youre just drawing some random line of where the stock might go youre BSing yourself. The HUman mind plays tricks on you by always trying to find patterns in everything in daily life, just like when you think you recognize someone's face at the supermarket but youve never seen them before!

I hope you realize my post (years ago) was being sarcastic. If you read the whole thread, surely you would have learned my true motivation behind starting the thread.

Mike

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  #326 (permalink)
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Big Mike View Post
I hope you realize my post (years ago) was being sarcastic. If you read the whole thread, surely you would have learned my true motivation behind starting the thread.

Mike

I realized you were being sarcastic. Maybe it came out wrong but I was just agreeing with you lol.

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  #327 (permalink)
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Mike,
This is a great demonstration of how easy it is to trick ourselves. Even a clock that doesn't tick is right twice a day!

How random were your lines? Our brains recognise patterns, have memory and are very strong at advanced mathematics. Catching a ball thrown up from a distance is a massive calculation done even by children who show zero aptitude for math. The act of trying to spread them out 'randomly' creates a kind of proportion of distribution that is 'beautiful' and therefore likely to match price movement, since that also moves in proportionate ways. And if you did them with your eyes closed, I'd say that isn't random enough, because you know where everything is on your desk with your eyes closed. Taking numbers literally from a hat may be random enough. Then, I would say that if we still see such synchronicity it would be very interesting.

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  #328 (permalink)
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vchase View Post
Mike,
This is a great demonstration of how easy it is to trick ourselves. Even a clock that doesn't tick is right twice a day!

How random were your lines? Our brains recognise patterns, have memory and are very strong at advanced mathematics. Catching a ball thrown up from a distance is a massive calculation done even by children who show zero aptitude for math. The act of trying to spread them out 'randomly' creates a kind of proportion of distribution that is 'beautiful' and therefore likely to match price movement, since that also moves in proportionate ways. And if you did them with your eyes closed, I'd say that isn't random enough, because you know where everything is on your desk with your eyes closed. Taking numbers literally from a hat may be random enough. Then, I would say that if we still see such synchronicity it would be very interesting.

I'm not @BigMike but I'm not sure if you read the early posts where he says that he used numbers from a third party number generator(random.org). Keep on reading the early posts and you will see those randomly generated lines magically "becoming" S/R.

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  #329 (permalink)
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GeekyTrader View Post
I'm not @BigMike but I'm not sure if you read the early posts where he says that he used numbers from a third party number generator(random.org). Keep on reading the early posts and you will see those randomly generated lines magically "becoming" S/R.

OK, I read several posts at the beginning and at the end. Missed that one.

Certainly interesting.... and mildly disappointing that this happens.
But knowing that it does, and acting on that knowledge is probably an advantage in itself.

Trade management is probably where the profits are anyway.

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  #330 (permalink)
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I think the point of this thread is to emphasize the importance of risk management LOL

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