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Random Price Movement

  • #1
  • First Post: Aug 30, 2006 9:22am Aug 30, 2006 9:22am
This experiment is for all those who waste their time studying, predicting, or otherwise making up stories as to why price moved. While I don't subscribe to the idea that price movement is completely random I do think most read too much into moves which are simply a result of noise.

The program randomly flips a coin 150 times and then generates a chart based on the results. If you try it a few times you can make every pattern imaginable.

It is a simple excel file but FF doesn't permit .XLS files so I had to zip it for upload. Full credit for the genius who wrote this is contained on the first page of the worksheet.

Enjoy, and think about what this tells you.

Phil
Attached File(s)
File Type: zip Coin Toss Stock Prices and Chart.zip   34 KB | 2,058 downloads
  • #2
  • Aug 30, 2006 9:51am Aug 30, 2006 9:51am
intresting, so is forex just a random walk?
  • #3
  • Aug 30, 2006 10:01am Aug 30, 2006 10:01am
Quoting ForexDrew
intresting, so is forex just a random walk?
It's not completely random, but you have to think in probabilities when you think about forex, or any other market for that matter. There is no "certain" thing.

All those indicators and studies we are using, can tell us when the odds are in our favour that the price will go in the direction we think it will go, but still, it can go the other way. There are too many variables (people and/or trading institutions) involved and we can't know what all of them are doing or will do in the near future, so anything can happen at any given moment.

So, I guess, the best we can do here is to make enough large number of trades so that, at the end, the odds will work in our favour.


branac
  • #4
  • Aug 30, 2006 10:05am Aug 30, 2006 10:05am
Quoting branac
It's not completely random, but you have to think in probabilities when you think about forex, or any other market for that matter. There is no "certain" thing.

All those indicators and studies we are using, can tell us when the odds are in our favour that the price will go in the direction we think it will go, but still, it can go the other way. There are too many variables (people and/or trading institutions) involved and we can't know what all of them are doing or will do in the near future, so anything can happen at any given moment.

So, I guess, the best we can do here is to make enough large number of trades so that, at the end, the odds will work in our favour.


branac
branac,

Very well stated! The market isn't completely random. There is still fear, greed, and a herd mentality. But it also means that you shouldn't focus on every candle and search the internet to see why something moved 5 pips.
  • #5
  • Aug 30, 2006 11:19am Aug 30, 2006 11:19am
Phil,


What is you thinking on averaging down on a losing trade, but with a stop loss point at X amount of your account. If the market is up/down (random) surley a average price will help a trader make money.

Give me your thoughts,

boycie.
  • #6
  • Aug 30, 2006 11:20am Aug 30, 2006 11:20am
I got a Head and Shoulders pattern out or a random coin flip:
Attached Image
  • #7
  • Aug 30, 2006 11:25am Aug 30, 2006 11:25am
Quoting boycie
Phil,


What is you thinking on averaging down on a losing trade, but with a stop loss point at X amount of your account. If the market is up/down (random) surley a average price will help a trader make money.

Give me your thoughts,

boycie.
There is a fine line here. If you place a stop and you allow yourself to risk 3% (for example) then you're done. You've got no bullets left to fire. But, if you are in a choppy market and you risk 2% of your allowed 3% (same stop) and then you can get a better price on the remianing 1% (using the original stop) then I'm good with that. I do this on occasion in a slow market. In a trending or fast market you can get left behind with a partial position. I've dont that as well so don't get cute with this.

It is foolish of any of any of us to think that we got the best price when we decided to enter the market. Many times you can get a slightly better price. The key points are that you MUST define your risk up front and you can NEVER lower your original stop and you can NEVER exceed your initial pre-determined risk amount.

Phil
  • #8
  • Aug 30, 2006 11:29am Aug 30, 2006 11:29am
Phil, so here is the wierd part, you would have made a profit on the TP of the pattern. LOL Scott
Attached Image
  • #9
  • Aug 30, 2006 12:22pm Aug 30, 2006 12:22pm
From what I understand, while it is basically true that it doesn't matter how many heads in a row you get from flipping a coin, the chances of getting a heads is 50%. Yet, according to the law of large numbers, from what I understand, when you get large inconsistencies (like 20 heads in a row) the probabilities for getting another heads isn't actualy 50-50
  • #10
  • Aug 30, 2006 12:24pm Aug 30, 2006 12:24pm
Yes, that is correct. The coin has no memory. this toss in no way influences the next. In fact, only with large numbers does one approach a equilibrium.

A very good book to read on the idea of randomness is "Fooled By Randomness" I think it is cheap from Amazon.Com




Quoting ForexDrew
From what I understand, while it is basically true that it doesn't matter how many heads in a row you get from flipping a coin, the chances of getting a heads is 50%. Yet, according to the law of large numbers, from what I understand, when you get large inconsistencies (like 20 heads in a row) the probabilities for getting another heads isn't actualy 50-50
  • #11
  • Aug 30, 2006 12:36pm Aug 30, 2006 12:36pm
Quoting smjones
Phil, so here is the wierd part, you would have made a profit on the TP of the pattern. LOL Scott
Scott,

It even retested the neckline...LOL
  • #12
  • Aug 30, 2006 12:48pm Aug 30, 2006 12:48pm
I didn't see that. You are right... Looks like a trend... so do you use a 50 ema or 50 wma? Also, Why do you think it went up so high on the retest? was there some coin toss news released then???



Quoting philmcgrew
Scott,

It even retested the neckline...LOL
  • #13
  • Aug 30, 2006 1:12pm Aug 30, 2006 1:12pm
Quoting smjones
I didn't see that. You are right... Looks like a trend... so do you use a 50 ema or 50 wma? Also, Why do you think it went up so high on the retest? was there some coin toss news released then???
NFP

New F*** Penny :
  • #14
  • Aug 30, 2006 1:13pm Aug 30, 2006 1:13pm
I got to thinking about it and that brings up an interesting point. There was no bias here, because it was random and yet here is the pattern. What caused it? Well it would be easy to say in terms of a market that there were more sellers than buyers or more tail than heads, but That really on a deeper level is not true. What there actually was, was congregation of tails to heads in a very small data set. This really tells nothing of trend at all, because there is no bias in this case it is random.

It makes no sense at all to look at small data sets in any market and try to determine a cause for movement... Only with a larger sample can even a trend be seen. And that is probably due to a self fulfilling prophecy.
  • #15
  • Aug 30, 2006 1:29pm Aug 30, 2006 1:29pm
Quoting ForexDrew
From what I understand, while it is basically true that it doesn't matter how many heads in a row you get from flipping a coin, the chances of getting a heads is 50%. Yet, according to the law of large numbers, from what I understand, when you get large inconsistencies (like 20 heads in a row) the probabilities for getting another heads isn't actualy 50-50
I wasn't sure if this was a typeo or not. But to be clear, the probability of heads is 50% regardless of how many times you tossed the coin.

Here is a nice explanation:

http://www.peterwebb.co.uk/probabili... large numbers
Secret Identity: Bill Sullivan
  • #16
  • Aug 30, 2006 1:39pm Aug 30, 2006 1:39pm
I have seen the coin flip deal applied to money management in many books and articles. I have never seen anyone use it for evaluating technical analysis. If we couldn't see patterns in price movement, and market was truly random, the whole game would be money management and trading would be ruled by accountants. Sorry in advance to the accountants, but, Y A W N ! !
Profit is where readiness meets Opportunity
  • #17
  • Aug 30, 2006 1:47pm Aug 30, 2006 1:47pm
Quoting Captain Piptastic
I wasn't sure if this was a typeo or not. But to be clear, the probability of heads is 50% regardless of how many times you tossed the coin.

Here is a nice explanation:

http://www.peterwebb.co.uk/probabili... large numbers
That was an absolutely fascinating explanation. Thanks for finding that.
  • #18
  • Aug 30, 2006 1:49pm Aug 30, 2006 1:49pm
Quoting FXopportunist
I have seen the coin flip deal applied to money management in many books and articles. I have never seen anyone use it for evaluating technical analysis. If we couldn't see patterns in price movement, and market was truly random, the whole game would be money management and trading would be ruled by accountants. Sorry in advance to the accountants, but, Y A W N ! !
Your point is well made...I just can't figure out what side you are on. Trading success IS largely due to money management. Your system is just there to goose you and tell you when to enter the market.

Phil
  • #19
  • Aug 30, 2006 1:51pm Aug 30, 2006 1:51pm
This approach using a random coin toss as applied to TA is discussed in the book "A random Walk Down Wall Street" I do not agree with everything in this book, but the chapter on this topic is very good.



Quoting FXopportunist
I have seen the coin flip deal applied to money management in many books and articles. I have never seen anyone use it for evaluating technical analysis. If we couldn't see patterns in price movement, and market was truly random, the whole game would be money management and trading would be ruled by accountants. Sorry in advance to the accountants, but, Y A W N ! !
  • #20
  • Aug 30, 2006 1:59pm Aug 30, 2006 1:59pm
Quoting philmcgrew
Your point is well made...I just can't figure out what side you are on. Trading success IS largely due to money management. Your system is just there to goose you and tell you when to enter the market.

Phil
Hello Phil,

I don't really feel like there is a side to be "on". I use money management relative to my technical analysis. To me they are not really sepereate things but completely bound to one another. There is technical reasons for my entries and my exits. Not so much on a % or a formula like so many use although I am in tune with the proportions neccessary for success.
Profit is where readiness meets Opportunity
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