Market Random and Predictable Parts

I posted on a thread like 10 minutes ago about this. I want to know your opinion about my thoughts.

What I believe is that the market has a random and a predictable part, so I call the market ALMOST RANDOM. To explain it, I created the following situation:

Imagine I'll be making one trade each day. TP:10 pips, SL:10 pips. I can't look at the charts. The entries are as follow: I toss a coin, and if it's heads, I buy; if it's tails, I sell.

After a full year of trades, what will be my outcome? Did I win or did I lose? Or maybe I just didn't make any profit or any loss at all?

But the interesting part is this: imagine another person took the opposite trade each time I traded. If I bought, he sold; if I sold, he bought.

This would make 50% of the traders actually make money, and the other 50% lose money. Hah! I just improved that cursed 5% ratio by 45%!

Well, the point is not that. The point is... would this convince you to think that the market is random? Not me. As I said, I think it's ALMOST RANDOM. My explanation is the following.

I believe that if we were trading the EUR/USD for example, the one who made more boughts would have won (well, at least he would have had the greatest probability of both of these people). Why? Because the EUR/USD has been in an uptrend in general. Why? Because of fundamental facts, like the European Union is getting strong or whatever.

A more clear example is the USD/MXN (why the MXN? well, I live in Mexico and the mexican peso is a really downtrending currency lol). I can tell you that the one who bought more times, had the most probability to win, because well... the USD is always getting stronger and the mexican peso is always getting weaker. Why? Again, because of fundamental facts.


I'm not trying to pull out a theory like technical analysis is worthless and fundamental analysis rules. There are some technical analysis indicators that work a lot of times and all of that.

I just thought about this to prove that the market is somewhat random, and it's most predictable part is made of fundamental analysis.

So, what are your thoughts?

No, markets is not random.

Best,
Tom

The market's not random, it's just difficult to interpret.

"Down" is not exact. Rarely does fundamentals get exact (stocks,). Technical analysis is exact and, with enough skill, tells the chartist where price goes within a reasonable certainty. A user of fundamentals can derive the latter too.
A chart is more easily interpreted when including fundamentals.

Personally, I do chart studies only. It can be disturbing at times to not know the verbal "Why" of it and at the same time the chart study I use is dead on about what future portion of the chart my study worked for.
That's okay, though, I'd rather be exact about a percentage of the chart than just get a general, if more overall definite, direction, from fundamentals.

To each one's own, though, and best of luck to you.

In your coin toss example, 50% of them win by good luck and 50% of them win by bad luck.

Yes fundamental analysis does provide some bias but it is not always right too. The USD in the crisis 2008 is a good example. The one who constantly sold USD has already been wiped out long time ago before he/she got chance to make it back.

You know what, I just read some concepts about randomness, and now, market can't simply be called random. If there are some patterns that sometimes work, then it can't be called random.

Rather, what I want to state is what you said ha-pattern. The market is difficult.

But now what intrigues me is if my little experiment would really work and throw a 50% of the traders making money and a 50% losing money.

If my experiment is true, couldn't we call the market random like a coin toss? I wanna remind all of you that we're not looking at charts, just like we're not knowing what all the other traders of the world are doing (I'm not that good in probability, but I think that if you add more and more variables to a scenario, the probability changes).

I think that the market is really random if you don't look at charts or fundamental facts and only trade. Just like if you toss a coin and you don't know about the wind conditions affecting the coin, which part of the coin has more mass, etc.

What are your thoughts?

Oh there was no one who constantly sold USD. Remember, it was a coin toss everyday, like one sold one day and the other one bought.

Ok I misunderstood what you tried to mean.

Let's take your EUR/USD & USD/MXN for example, repeat your coss toin process for at least 1000 days then u tell me who will win by having edge on fundamental analysis.

I was thinking about a tennis match:

If we put a professional to play against a novice, the professional will win most of the times.

Now, we bet for one of them without knowing their skills or knowing that one is a pro and the other one a noob. After 10 matches, we realize that player A has won all of the matches, so we start to bet only for player A. After 1000 matches, we get a score of 15 losses and the rest wins.

We had the same conditions as trading the market. We didn't know anything about the charts or anything. We just bet. Nevertheless, we started to see that player A was winning most of the times, and in the end, we won because of that.

In the forex situation, our players are Sell and Buy. Do they have different probabilities of occurring? And if they do, what's affecting these probabilities?



I got a new hypothesis: the market is random just like a coin toss... BUT, we can predict it because we know some internal variables (our charts).

Imagine this: A coin toss has a 50-50 chance. But if we know that if that coin toss occurs in a hot weather, it will throw a heads more often. If it's cold, it will throw a tails more often.

I think our charts are like the weather in my weird example above. The market's nature is to have a 50-50% chance, but we can win to the market because we know some other variables affecting it.

Ahh... it's too late, I'll go sleep. What do you think about this?

Thanks for your replies

My point is that 1 person will win, and the other one will lose. If we take 1000 people to buy one day, and other 1000 people to sell that same day, at the same our, with the same TP and SL, we'll get 1000 winners and 1000 losers. Thus, we can get a 50-50 chance of winning/losing.

If this is true (which I really think it's true unless I'm missing something), this would mean that if 50% of all the traders in the world traded one way while the other 50% traded the other way, we would always get a 50-50 game. This would also mean that, under these specific conditions, the market would be just like a coin toss.

"Ah ha! 'under these specific conditions', there's the key" Ya, we're forcing the scenario to meet these conditions, but, in my tennis match, we bet using the very same conditions and we could win far more times. This is because one of the players is a pro, and the other one is a novice.

If we try to apply the same conditions to the market, the Bulls or the Bears would need to be the "professionals" and the Bears or the Bulls would need to be the "noobs." Now, an interesting question is: what factor(s) make the Bulls or the Bears the pros or the noobs?

Also, let's assume that the USD has been an uptrend-"professional" during the last X period of time. What made the USD an "uptrend-professional"? (I mean, the USD has had more bulls than bears).

If you say that it's been because the US has a very strong economy, etc. you're saying that what puts more weigh into the Bulls is a fundamental fact.

On the other hand, if you say that fundamental facts affect them equally, then it could turn out that the market is pure randomness.

Baaah... I'll go sleep.

The market is not random and fundamentals don't provide predictability.

There is plenty of research on exchange rate predictability based no fundamentals. The summary is that that they don't predict rate moves.

(Having said that, there are some large players who base their strategies on sophisticated models for detecting imbalances in supply/demand based on more economic data than are available to the public.)

It is private information, not available to the public, that moves the market. A minority with an information advantage (and well informed technical traders detecting what's going on) place their bets on that, and the less well informed majority lose.

The price time series may display statistical properties similar to randomness, but that doesn't mean that it's random. To illustrate this apparent paradox, think of a series of numbers generated by, for example, Excel's random number generator function, RAND. The series certainly displays statistical properties, but using the tools and methods used by, e.g., the NSA or GCHQ it can be "cracked" and the underlying algorithm discovered.

The "cracking" of the fx time series, in the intra-day perspective, is provided by understanding market structure, i.e. the way the market is organised and the ways in which its participants go about their business.

More specifically, the fx market is a limit order market dominated by a relatively small number of large participants. The understanding of this structure is what provides predictability. You can read up on the details in Carol Osler's papers - see http://people.brandeis.edu/~cosler/ (click on 'Research' in the right hand column). In one of the papers, Extreme Returns Without News, the the extreme moves in intra-day currency markets are explained by "clustering of limit orders in time and price". The understanding of that, and how to detect it in the charts, provides the most profitable way of trading there is.

Still, of course, the market is somewhat random at times when not much is going on in terms of order flow. Also, equity market correlations could be considered a random disturbance - that's why it's best to trade the European morning.

Market is not random. It is not true there is a seller for every buyer. It is more like 1000 loseres and one winner.

Read the books from Wyckoff and Tom Williams!


Regards

I'm not sure that's right is it, what about spread?

Try read "Fooled by randomness" by Nassim Nicholas Taleb

There's a piece of writing that is hugely over-rated... Stay away, I'd say.

Market isn't random, it's chaotic.

I agree with you amherag, it's predictable and it contains some randomness aswell. That's why even the best system hasn't a 100% win rate.

Exactly. In this 50-50 situation both participants would be losers, the only winner would be the broker!

I was thinking on a "perfect system", just like in physics you sometimes develop perfect systems just to study the essence of the problem (like machines without friction or loss of energy). That's why I didn't add the spread.

I'd agree with the idea of the market being chaotic.

What I wanted to "prove" or actually get some agreement from some of you, is that the market has "something" like randomness. I'll call this randomness chaos from now on.

Thinking about this concept is actually helping me on my systems development.

My point wasn't to say that the market is all random and that trading it is just a waste of time. It obviously isn't a waste of time, it can be predicted, etc. The proof is that a lot of us are actually making money out of the market with our trading systems.

I just wanted to state that the market, in its essence, has some randomness or chaos in it.

Well, thanks a lot guys

There is a ribbon of intelligence that runs throughout the markets. However, there is just enough chaos thrown in just to throw off inexperienced as well as incompetent traders.

Perfect description of what I was thinking! What I actually want is to try to define and isolate this chaos or ribbon of intelligence. I think it'd be almost impossible to do it, but trying to understand them would help us a lot.

Often those ribbons can be right in front of your face, but like I said, they are very well disguised by the MMs. The longer you trade, the better you become at finding out where the ribbons are hidden (high probability plays).