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Random Line Theory
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Created: by Big Mike Attachments:100

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Random Line Theory

  #81 (permalink)
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sharky View Post
@trendisyourfriend first that trade was a horrible trade you entered on a pullback against the trend i would never suggest anyone to take a trade like as its putting you into a contertrend trade late your asking for a losing trade when you do that,your 2nd entry should have been your trade not the first trade...sharky

Easy to tell in hindsight. The trade was a valid setup where price is breaking a trendline, followed by a small pullback and a reversal bar in the direction of the breakout. I don't see anything horrible here.

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  #82 (permalink)
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Thanx Mike , for some thing new to us.
Just for test, here i drew 5 random lines for 4-Jan session on NiftyFuture chart.
Will carry-out this for few days and post.
These numbers are generated from Random.Org and in sequence given.
God , how "Random" knew it has "some thing" upside ...its day, its moment, everything coincides with it. Cy

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  #83 (permalink)
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Here are the random lines generated just now by random.org, 200 ticks above and below the close.

These are for tomorrow.

Mike

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  #84 (permalink)
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What about this? Will both make you money and solve the carbon emission problem....

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  #85 (permalink)
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Big Mike View Post
It's pretty neat, right??

I hope it will drum up some conversation about the psychological impact of lines. What I mean is how we, the trader, and our minds end up assigning these properties to lines, like support and resistance. It is so easy to make those assumptions, to assign those values. And we can go into a lot of reasons why it makes sense to do so.

But then we have now several days of purely random lines that would seem to exhibit the same properties. To me, what this means is the lines are not important, what is happening is we are assigning importance to them. I mean, what else could it be?

I will keep going and keep posting daily charts so we can continue to gather some more samples. The results so far are very fun, at least.

I believe it was @Fat Tails that said that these lines are not important because they are just random, but other lines, like pivots, are not random and therefore carry more importance (or weight) because they are based on something that has logic behind it, or at least they are widely used which automatically assigns them more importance.

While I totally see the point of his argument and I even agree with it, hell I use pivots in my own trading, this entire thread really makes you question some of those beliefs.

@redratsal in the very beginning of the thread questioned whether or not we were exploring the Random Walk Theory, and maybe that is indeed exactly what we are doing. Are the markets random? It's an aged old debate, where I believe that the majority of people have a feeling of "The markets are somewhat random, but not completely random because they are driven by peoples actions".

But if people/traders are making trading decisions at random (which one could argue the majority of retail traders are), does that mean that since those decisions were random that the result ("the market") is also random? What I mean is that a lot of retail traders seem to have a plan or a system, a method, in place, but if you actually look at either what powers that method or at how the trader is actually executing on that method, I believe the results would be random. Maybe chaos is better than random.



Thoughts?

Mike


The diversity in analytic techniques, time frames, motivation, and perception of data, insures that the struggle between supply and demand will be lumpy over certain periods of time, which consequently leads to a non-linear effect on price. These price changes themselves affect traders’ perception of value. The result is a hyper-sensitive system, where various drivers of price have a chaotic effect on outcomes, and make prediction difficult.

Yet, if traders truly believed that the market did not follow a deterministic pattern, there would be no traders. Instead they choose to adhere to the principle that there is a relative probability that outcomes can be approximated. TA reflects the different psychological states of market participants, QA reflects the automated constraints of mean reversion, and in effect may be the strange attractors that allow us just enough an edge to profit.


Last edited by tigertrader; January 3rd, 2011 at 07:43 PM.
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  #86 (permalink)
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IMO the Random walk theory applies to longer time frames, if you are a day trader drawing and hitting your random lines is pure chance, the conclusions are purely subjective.

Courtesy of Investopedia

Random walk theory gained popularity in 1973 when Burton Malkiel wrote "A Random Walk Down Wall Street", a book that is now regarded as an investment classic. Random walk is a stock market theory that states that the past movement or direction of the price of a stock or overall market cannot be used to predict its future movement. Originally examined by Maurice Kendall in 1953, the theory states that stock price fluctuations are independent of each other and have the same probability distribution, but that over a period of time, prices maintain an upward trend.
In short, random walk says that stocks take a random and unpredictable path. The chance of a stock's future price going up is the same as it going down. A follower of random walk believes it is impossible to outperform the market without assuming additional risk. In his book, Malkiel preaches that both technical analysis and fundamental analysis are largely a waste of time and are still unproven in outperforming the markets.

Malkiel constantly states that a long-term buy-and-hold strategy is the best and that individuals should not attempt to time the markets. Attempts based on technical, fundamental, or any other analysis are futile. He backs this up with statistics showing that most mutual funds fail to beat benchmark averages like the S&P 500.

While many still follow the preaching of Malkiel, others believe that the investing landscape is very different than it was when Malkiel wrote his book nearly 30 years ago. Today, everyone has easy and fast access to relevant news and stock quotes. Investing is no longer a game for the privileged. Random walk has never been a popular concept with those on Wall Street, probably because it condemns the concepts on which it is based such as analysis and stock picking.

It's hard to say how much truth there is to this theory; there is evidence that supports both sides of the debate”

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  #87 (permalink)
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redratsal View Post
IMO the Random walk theory applies to longer time frames, if you are a day trader drawing and hitting your random lines is pure chance, the conclusions are purely subjective.

Random walk is just a model. If the model was correct, you would observe Gaussian distributions for lognormal prices.

In reality you will not find Gaussian distributions, so by using the terms of Karl Popper, the random walk theory has been falsified and can be refuted.

In particular, random walk theory does not allow for fat tails. Their existence is the explicit proof that you can make money as a technical trader.

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Fat Tails View Post
Random walk is just a model. If the model was correct, you would observe Gaussian distributions for lognormal prices.

In reality you will not find Gaussian distributions, so by using the terms of Karl Popper, the random walk theory has been falsified and can be refuted.

In particular, random walk theory does not allow for fat tails. Their existence is the explicit proof that you can make money as a technical trader.

Hi Fat,

According to Karl Popper's falsiability assumption "... a theory should be considered scientific if and only if it is falsifiable...", therefore by asserting it is false you consider the Random walk a scientific theory

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  #89 (permalink)
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redratsal View Post
Hi Fat,

According to Karl Popper's falsiability assumption "... a theory should be considered scientific if and only if it is falsifiable...", therefore by asserting it is false you consider the Random walk a scientific theory


Let us say that the falsification is one of the conditions required for a scientific theory. But the reverse is not true, or would you consider anything that can be proven false to be a scientific theory?

But yes, the random walk concept - which is based on market efficiency - is a useful scientific theory. However, when the market behaves in line with its predictions, it is not easily tradeable.

The falsification of this theory was achieved by Benoit Mandelbrot, best shown in his book

The (mis)Behaviour of Markets - A Fractal View of Risk, Ruin and Reward

Worth reading. His work has been continued by a number of econo-physicists.

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Today is a good example why knowing where are important levels or even mathematical levels like daily pivots or natural levels like yesterday high, RTH High/Low etc. play a minor role in winning the game. The name of the game is patience (persevering in the face of delay) to wait for the easy to identify moves.

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