If something doesn't look like random then it is not random. If you find a pattern on a price chart that is repeated over and over all the time and that won't appear on a random chart then you have found your edge. Some of these patterns are difficult to spot with the naked eye.
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That bring us back to my question to the OP. Why trying to compare a supposedly random chart (which is not truly random anyway) to a price chart on which without any difficulty patterns of non-randomness can be identified.
I am not a mathematician, but as far as I am aware a random chart should not display or exhibit any repetitions of any patterns.
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There can certainly be patterns and repetitions in random data. We can flip heads ten times in a row, and the same principle allows random chart data to appear as a wedge, s&r, waves etc. Instead of heads, we're just getting the data points. The reason random data looks real is because we have so many patterns in our memory that we're bound to find a fit. Then consider that TA patterns are so simple that often only 2-3 data points are needed.
There can certainly be patterns and repetitions in random data. We can flip heads ten times in a row, and the same principle allows random chart data to appear as a wedge, s&r, waves etc. Instead of heads, we're just getting the data points. The reason random data looks real is because we have so many patterns in our memory that we're bound to find a fit. Then consider that TA patterns are so simple that often only 2-3 data points are needed.
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Ok,
but...again, how would you (taking this into account) gain an advantage (or as the OP says: 'increased confidence') in the application of technical tools by simply comparing the two patterns?
If that is what they are - patterns- then it should not matter how they are generated nor should it matter how one compares to the other. The mere existence would indicate an exploitable advantage. Therefore it would make more sense to compare 'more' past data from the same data set to identify 'how repetitive' these patterns are. Even if all charts (artificially generated or not) were random, then clearly the degree of randomness inside one chart is of greater importance than the correlation of randomness between different charts.
There can certainly be patterns and repetitions in random data
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No.
The definition of randomness is that it does not contain patterns. A pattern is defined as something that is not-random. a streak of consecutive heads or tails in random coin flips is not a pattern. It would be a pattern if it would occur more often than it should with statistical significance and then it could be concluded that it is no fair (random) coin-flip anymore.
The only difference between a random and a real price is that the random is created by computers and the real by people, if there is some difference in long term between both, it would be the sentiments, people has greed and fear, these sentiments can be seen in news events and in supports and resistances, if you can find similar patterns to news and S/R in a big enough random chart, you better don't trade.
if you can find similar patterns to news and S/R in a big enough random chart, you better don't trade.
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No.
If you find patterns in random data then you ere either not looking at random data or your mind is playing tricks on you. You would then do some statistical tests to prove whether these patterns are real or only an illusion.
In real market data you will find patterns that are no illusions, patterns with statistical significance. Otherwise you could never trade it profitably.
If you find patterns in random data then you ere either not looking at random data or your mind is playing tricks on you. You would then do some statistical tests to prove whether these patterns are real or only an illusion.
In real market data you will find patterns that are no illusions, patterns with statistical significance. Otherwise you could never trade it profitably.
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With what stadistic method can you quantify if a pattern is statistically significative?
If you find patterns in random data then you ere either not looking at random data or your mind is playing tricks on you. You would then do some statistical tests to prove whether these patterns are real or only an illusion.
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The reality is a little bit more complicated:
This means that a good random number generator will also produce sequences that look nonrandom to the human eye (e.g., a series of ten rolls of six on our die) and which also fail any statistical tests that we might expose it to. If you flip enough coins, you will get sequences of coin flips that seen in isolation from the rest of the sequence don't look random at all. Scott Adams has drawn this as a Dilbert strip, which is funny exactly because it is true:
The definition of randomness is that it does not contain patterns
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Sorry, I was talking about our perception. I.e. we take random data and our brain picks out data points to reflect known patterns.
Quoting H. Rearden
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but...again, how would you (taking this into account) gain an advantage (or as the OP says: 'increased confidence') in the application of technical tools by simply comparing the two patterns?
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I don't know. I don't think it's the data itself that it's important, but the fact that it represents human action. I hold the real data as valuable because it is real data. I don't see the value in comparing it to randomly-generated data, but maybe a better trader than me does.
Joined Feb 2009
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Status: Everything is relative
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Either way,
the question was whether real charts can be distinguished from randomly generated charts with the naked eye (I suppose that would mean without any time scale or instrument description on the charts).
My point was that regardless of the possibility of doing so exists or not, it will not lead to what the OP described as 'enhanced confidence' when applying technical tools to real price charts.
The reason I stated lies in the data itself, hence why we believe what we 'see' and what we identify as the reasons behind what we 'see'.
It would make sense to say that while a random pattern generator might come up with what could be described as a 'trend' on a random chart, we would most likely conclude the reason behind the 'random pattern' is the generator doing what it does: throw out random patterns.
Based on that assumption, if we 'see' a trend on a price chart, our conclusions become more complex in that they include the knowledge about an array of factors that are responsible for throwing out a 'trending pattern'.
Factors like fundamentals that are taken into account by a great deal of market participants, technical aspects, crowd behaviour (someone mentioned fear and greed), psychology (your own and extrapolated to the masses), volume, liquidity and last but not least market timing (I am sure there is more).
In terms of choice, I'd rather look at a chart that has something as predictable as human involvement (emotions that are common in the majority of participants) as a reason for price movement and the resulting chart representation of it, than a number generator that is far less predictable.
if you can find similar patterns to news and S/R in a big enough random chart, you better don't trade.
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The problem is you can, and I've had many hours of amusement watching traders analyse completely random time series. Ive seen them pointing out oscillator divergence, fib levels, trend lines, wedges, candle patterns etc etc. Its hillarious to see them picking out pin bars at support and resistance, or bounces from a fib level.
I've also spent a lot of time applying technical analysis to random data sets, I think most people who are remotely serious about using TA have done exactly the same.
Its a useful exercise, but the reality is that market exhibits behaviour can be exploited.
It's a proven fact that randomized time-series charts can be distinguished from real price charts to a certain degree of accuracy.
Abstract from a recent MIT paper:
We construct a financial “Turing test” to determine whether human subjects can differentiate between actual vs. randomized financial returns. The experiment consists of an online video-game http://arora.ccs.neu.edu) where players are challenged to distinguish actual financial market returns from random temporal permutations of those returns. We find overwhelming statistical evidence (p-values no greater than 0.5%) that subjects can consistently distinguish between the two types of time series, thereby refuting the widespread belief that financial markets “look random”. A key feature of the experiment is that subjects are given immediate feedback regarding the validity of their choices, allowing them to learn and adapt. We suggest that such novel interfaces can harness human capabilities to process and extract information from financial data in ways that computers cannot.
The point is that most won't be able to just look at a real chart and random chart and point out the difference without first practicing analyzing the two, which I assume very few people here (including me) have done.
It's a proven fact that randomized time-series charts can be distinguished from real price charts to a certain degree of accuracy.
Abstract from a recent MIT paper:
We construct a financial “Turing test” to determine whether human subjects can differentiate between actual vs. randomized financial returns. The experiment consists of an online video-game http://arora.ccs.neu.edu[font=CMR12]) where players are challenged to distinguish actual financial market returns from random temporal permutations...
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There you go, case closed.
Massachusetts Institute of Technology says it can be done - no need for conducting another poll on the subject.
Great - could you not have come up with this a little earlier...would have saved us some time, hahaha.
I currently am on a 8 or 9 trade losing streak so I suggest that if you want to become unimaginably wealthy simply do the opposite of what I do and it will happen for you.
If I did the opposite of what I thought I should do it wouldn't work as the Forex gods would know and my losing streak would just continue anyway.
You however can benefit from my bad luck.
For instance, i am currently short GBP/CHF as it looked like Sterling had made a nice run and should retrace somewhat. Logical and the charts seem to back up my assertion. So I placed the trade. Didn't happen...still moving up.
What should you do? It's obvious. Don't even think about it.
Go long GBP/CHF now.
I will let you know the next trade I take when I determine how to lose even more money. That way at least someone will benefit.
Have a great day everyone.
BTW naked chart reading can't be random, I have lost nine in a row.
Massachusetts Institute of Technology says it can be done - no need for conducting another poll on the subject.
Great - could you not have come up with this a little earlier...would have saved us some time, hahaha.
H. Rearden
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The key is not if it's possible, but HOW. In that experiment you are noticed inmediately if you are wrong or not, but at the beginning you err the same times, so... Is your brain really identifying the real charts or the random method that is being applied to generate the fake charts?
The test is very easy. The smoother is usually real, and I guess most of us would go with it due to the inertia/momentum in the markets, while the noisier option looks like it better reflects common random distribution. I imagine the examples are picked for that reason. Much harder if someone is hand-picking samples of random data that look more realistic.
Course, it could all be a joke to make us look like fools!
The key is not if it's possible, but HOW. In that experiment you are noticed inmediately if you are wrong or not, but at the beginning you err the same times, so... Is your brain really identifying the real charts or the random method that is being applied to generate the fake charts?
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While I embrace your seeking for the truth in detail, I leave you with the rest of the participants do haggle over it.
The OP's question has been answered in general now and my guess is that contacting the ARORA designers will yield the best answer 'HOW' this works.
Personally, I am happy with my ability to identify points of opportunity on real charts that make money consistently over time - regardless of whether there is some correlation to random/fake charts or not.
