S/R and TL on Randomized Price Movement | Forex Factory

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S/R and TL on Randomized Price Movement

  • #1
  • First Post: Mar 25, 2010 8:53am Mar 25, 2010 8:53am
I have tried to generate random price movement and plot on a chart. Originally, my intention was to prove that price is not moving random but in a "cluster" like fashion with S/R and TL in action. However, what I discover seem to contradict to this idea. Here are the charts generated in two slightly different methods. On each of them, it seems to me there are clear support/resistance and Trendline. Why is that???? Is it a scientific discovery???

I have also attached the excel file with the formula on.

Any Ideas?
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Attached File(s)
File Type: xls RandSim.xls   222 KB | 533 downloads
  • #2
  • Mar 25, 2010 9:00am Mar 25, 2010 9:00am
Something like this.
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  • #3
  • Mar 25, 2010 10:38am Mar 25, 2010 10:38am
Quoting kk007
Why is that???? Is it a scientific discovery???
No.

You just discovered the reason why many people (falsely) believe price movement is entirely random. Because it almost looks *looks* like random. But it isn't. Your job as a trader is to find the few occasions where the probabilities of price doing something specific are not purely dictated by randomness.

BTW: Your trend lines are no valid trend lines. They don't align with the highs or lows.
  • #4
  • Mar 25, 2010 11:08am Mar 25, 2010 11:08am
Quoting 7bit
BTW: Your trend lines are no valid trend lines. They don't align with the highs or lows.
Thanks for your comment.
Like people saying that S/R is a zone, TL is a zone.
  • #5
  • Mar 25, 2010 11:09am Mar 25, 2010 11:09am
Quoting 7bit
Because it almost looks *looks* like random. But it isn't.
Any evidences or supports?
  • #6
  • Mar 25, 2010 11:19am Mar 25, 2010 11:19am
Very important question: how did you generate the chart? With rand()?
Did you try to group the 1000 prices on a bar? 1000 values are not enough, they are simply noise. Generate a few millions, group them in bars and be sure that there are some surprises in the box for you.
  • #7
  • Mar 25, 2010 11:27am Mar 25, 2010 11:27am
Quoting Sauron
Very important question: how did you generate the chart? With rand()?
Did you try to group the 1000 prices on a bar? 1000 values are not enough, they are simply noise. Generate a few millions, group them in bars and be sure that there are some surprises in the box for you.
The method is included in the excel attachment. There is only closing price not OHLC. Starting from price value of 1000, for each bar, I add a random value between -5 to +5 as the next closing price using Rand() (Sheet1). Altogether, there are 1000 bars. If each bar represent one day, 1000 bars are about 4 year of trading. should be enough.
  • #8
  • Mar 25, 2010 11:47am Mar 25, 2010 11:47am
There is your million dollar question, how does real data differ from random data.

How about comparing some hourly/daily (per nth day of month) ranges and distributions.. You might find something interesting.
  • #9
  • Mar 25, 2010 11:49am Mar 25, 2010 11:49am
So easy to generate a random graph and put on technical tools for interpretation!
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  • #10
  • Mar 25, 2010 12:03pm Mar 25, 2010 12:03pm
Fascinating.

I just created my own, start value of 1000, random addition between -5,5. Very obvious trendlines, breakouts, and other patterns.

I'm not so sure about horizontal s/r though.

Any ideas on how this affects trading decisions? Just because it's random doesn't mean you can't profit from it.
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  • #11
  • Mar 25, 2010 12:12pm Mar 25, 2010 12:12pm
985 pips
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  • #12
  • Mar 25, 2010 1:22pm Mar 25, 2010 1:22pm
Quoting dr_zeus
Just because it's random doesn't mean you can't profit from it.
If it's random you obviously can't profit from it.
  • #13
  • Mar 25, 2010 1:48pm Mar 25, 2010 1:48pm
Here's another good. Notice the how price obeys the huge trendline. MA cross (25/50/100) get you a great entry.

Cup and Handle in the middle of trendline shows reaction to the 900 psychology barrier. Resistance turns to support after break. Once 800 psychology barrier holds up, price pushes through the 900 resistance - which turns back into support, and has a huge positive move. Lots of pips. I can't believe you guys didn't read these signals.

Oh, and watch the Fibs. I pointed one out already, can you see the others?


All random.
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  • #14
  • Mar 25, 2010 1:51pm Mar 25, 2010 1:51pm
Quoting Ted1983
If it's random you obviously can't profit from it.
Unproven assertion.

I'm busy now, but I bet I can show the opposite using the same random excel file.
  • #15
  • Mar 25, 2010 1:53pm Mar 25, 2010 1:53pm
lol i use to go around for a while and link these random charts in threads with gurus.. and ask them how to read it...

anyone hear of the infinite monkey theorem?

The infinite monkey theorem states that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will almost surely type a given text, such as the complete works of William Shakespeare.
In this context, "almost surely" is a mathematical term with a precise meaning, and the "monkey" is not an actual monkey, but a metaphor for an abstract device that produces a random sequence of letters ad infinitum. The theorem illustrates the perils of reasoning about infinity by imagining a vast but finite number, and vice versa. The probability of a monkey exactly typing a complete work such as Shakespeare's Hamlet is so tiny that the chance of it occurring during a period of time of the order of the age of the universe is minuscule, but not zero.

sometimes randomness seems logical but it isnt I think and sometimes logic seems random fun to ponder
  • #16
  • Mar 25, 2010 2:00pm Mar 25, 2010 2:00pm
Quoting kk007
The method is included in the excel attachment. There is only closing price not OHLC.
Sorry, I didn't download the excel sheet and I don't have time to read the code. But to display real bars you must start from a value, generate 1000 offsets, calculate OHLC and then start from the last close. This is how the market works, if you want to simulate it you still have something to do.

Quoting kk007
Starting from price value of 1000, for each bar, I add a random value between -5 to +5 as the next closing price using Rand()
You could generate another random value to calculate the offset in pips. Instead of -5/+5 you'd have -1/+2/+1/-3/-1 etc. It models the market better.

Quoting kk007
Altogether, there are 1000 bars. If each bar represent one day, 1000 bars are about 4 year of trading. should be enough.
That's not true, you have 1000 random values which I must repeat, are NOISE. You need 1000x1000 at least.

Quoting dr_zeus
Any ideas on how this affects trading decisions? Just because it's random doesn't mean you can't profit from it.
If you can profit from it, it isn't random. Somewhere you made a mistake when you generated the numbers.
If you'd profit from random movements you would beat the casino in the long run, even the odds are not in your favor.

Quoting domino
lol i use to go around for a while and link these random charts in threads with gurus.. and ask them how to read it...
Me too, with a guy who had 16 ema's, 4 for every time frame of the same pair.

That's a perfect random generated chart, with a hardware number generator:
http://www.forexfactory.com/showpost...8&postcount=35
  • #17
  • Mar 25, 2010 2:01pm Mar 25, 2010 2:01pm
Hi kk007,

interesting topic & great examples!


Hi Ted1983,

I disagree, they are showing random charts & how TA applied as if they were real charts. Just look at the picture in post #9, I'm sure we could/can profit from random generated charts.

Cheers

Flint
  • #18
  • Mar 25, 2010 2:13pm Mar 25, 2010 2:13pm
I made my own excel, but it's the same as the thread starter. Start with 1000, and randomly add a number between -5 and +5 to it to generate the next number.

The whole point is that the random change looks just like a price chart. You can find fibs, S/R, psychological trendlines, and MA crosses. If it looks like a duck, quacks like a duck, and walks like a duck, why do you call it a goose?

The demonstration shows that there is little difference between actual forex market charts, and noise. They are both ducks.

OHLC or candlesticks don't need to be generated, although they could. I'll try to work on that when I get a break. I'm sure that wouldn't be an argument decider since there will be another reason to discount random walk.

Finally, you can't beat the casino because the odds are stacked against you. The random numbers there are from -7 to +3. You will eventually always lose.
  • #19
  • Mar 25, 2010 2:19pm Mar 25, 2010 2:19pm
It is not my intention to disagree with anyone regarding random numbers. As Sandra Bullock said it, everybody is happy if I'd wish world peace.
  • #20
  • Edited 4:01pm Mar 25, 2010 3:45pm | Edited 4:01pm
OHLC chart for Sauron.

Don't get mad Sauron, disagreement is healthy. Sorry if I came on too strong. This chart has 10 tics per period. formula for price is RANDBETWEEN (RANDBETWEEN(-12,-5), RANDBETWEEN(5,12)) to make it extra randomy :-)

Once again, TA patterns become clear. MAs indicate entries, trendlines form and break, pin bars and inside bars give good signals.

If you do this yourself you'll see all kinds of charts form - ranging periods, large trends. I've tried to pick charts that have a mix.

Next up I'll try to write a trading system to go with this and see how it does. Probably just a simple MA cross since I don't want to bother with anything too complex. I think it's obvious that money management is more important that just about anything else. I think it's also obvious that price can randomly pick a direction and stick with it for a while, and then randomly not go anywhere.
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