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  • #1
  • First Post: Edited 12:20am Dec 9, 2013 12:01am | Edited 12:20am
I am curious on what justification do any of us have to have accepted the assumption of price predictability and market innefficiency?
Is it faith or hope that in fact innefficiencies exist in the market and that we are actually able to profit? or do we actually have evidence and sufficient reason to support the asumption of an inneficient forex market?
In economics and finance it is often said that profit comes from information, a well informed investor is able to profit from temporary market inneficiencies or mispricing of certain assets, if in fact such inefficiencies occur.

What makes any of us well informed? why have you dismissed Efficient Market Hypothesis? or how exactly have you come to the conclusion that random walk is incorrect?
AVT INVENIAM VIAM AVT FACIAM
  • #2
  • Dec 9, 2013 4:32am Dec 9, 2013 4:32am
Quoting the redlion
I am curious on what justification do any of us have to have accepted the assumption of price predictability and market innefficiency? Is it faith or hope that in fact innefficiencies exist in the market and that we are actually able to profit? or do we actually have evidence and sufficient reason to support the asumption of an inneficient forex market? In economics and finance it is often said that profit comes from information, a well informed investor is able to profit from temporary market inneficiencies or mispricing of certain assets, if in...
I've shown you previously that I can pick a true market chart from a bunch of random charts you generated. Maybe I was just lucky that one and only time, or maybe there is something about the markets that isn't quite so random. The odds weren't in my favor, but I still apparently got it right the first time.
Congratulations ScalaFX for coming out of the closet!
  • #3
  • Dec 9, 2013 5:18am Dec 9, 2013 5:18am
Hello Redlion,

When you analize a security with a time horizon bigger than a couple of months you are making a prediction of the future. The market efficiently gathers all predictions and shows us the average vision. After that, each individual will have its vision based on the same information and will therefore obtain different results.
  • #4
  • Dec 9, 2013 5:20am Dec 9, 2013 5:20am
Quoting the redlion
I am curious on what justification do any of us have to have accepted the assumption of price predictability and market innefficiency? Is it faith or hope that in fact innefficiencies exist in the market and that we are actually able to profit? or do we actually have evidence and sufficient reason to support the asumption of an inneficient forex market? In economics and finance it is often said that profit comes from information, a well informed investor is able to profit from temporary market inneficiencies or mispricing of certain assets, if in...

It's neither the price predictability or random walk.. simply put, it's Probability. A position worth at best slightly over 50/50 chance of wining, which without proper risk management before and after trigger it's no good and would not produce consistency.

I can assure that even the one's who may have access to inside info, still won't guarantee wins and for sure no consistency.. and random walk, to say the least is not reliable for the long run. Price predictably belief is for stage 3 traders.. that refers to incomplete trader. Random pick, is for even more incomplete trader.

.. IMHO.

regards,
Passion, Persist, Patience, Protect
  • #5
  • Dec 9, 2013 6:09am Dec 9, 2013 6:09am
As long as there's a human motive behind price, it will always be predictable to some extent.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #6
  • Edited 8:06am Dec 9, 2013 7:18am | Edited 8:06am
Quoting the redlion
I am curious on what justification do any of us have to have accepted the assumption of price predictability and market innefficiency? Is it faith or hope that in fact innefficiencies exist in the market and that we are actually able to profit? or do we actually have evidence and sufficient reason to support the asumption of an inneficient forex market? In economics and finance it is often said that profit comes from information, a well informed investor is able to profit from temporary market inneficiencies or mispricing of certain assets, if in...
Hi Red. I only trade currencies, so perhaps random walk exists in other markets. It may exist at times in the forex, particularly during the time between fundamental announcements. But, given the structure of foreign exchange, and once a FA hits the news wires, the forex can become very predictable, and remain so until the impact of the FA is fully priced, which can take days/weeks/months. That is my experience as a trader. I think there is plenty of evidence to support that conclusion.
  • #7
  • Dec 9, 2013 7:59am Dec 9, 2013 7:59am
we are all trade to win, at least that it self is a very predictable and solid

and one point that i think still valid for trading this behavior is news time. especially if the forecast is off
  • #8
  • Dec 9, 2013 9:01am Dec 9, 2013 9:01am
Quoting nubcake
{quote} I've shown you previously that I can pick a true market chart from a bunch of random charts you generated. Maybe I was just lucky that one and only time, or maybe there is something about the markets that isn't quite so random. The odds weren't in my favor, but I still apparently got it right the first time.

you are right, you were able to pick out the Real Market chart amongs pseudo-randomly generated charts ( I use pseudo random because I do not think true randomness can be achieved specially not confining the randomness to parameters, the parameters I used was to obtain a random norlmally distributed return and in effect substracted or added to previous closing price)

Here what interests me, HOW were you able to pick out such chart?
is it a lucky break? would you be able to continue to pick out charts repeatedly (this would be statistically significant), and what is different between a random chart and a real chart?
was it that you subconsiously remember the pattern because you had previously seen it , and it was subconsiously familiar to you?


you see I bring this topic up, because there has been many studies that seem to point to an efficient forex market, and we all hold the belief that we can profit from innefficiencies, some of us trying to out analyse the underlying drivers via fundamental analysis; while some of us trying to find patterns in historical behavior via technical analysis. Yet I do not think we have sufficiently establish that in effect our views are correct and the market is truly inefficient.

"Beyond the normal utility maximizing agents, the efficient-market hypothesis requires that agents have rational expectations; that on average the population is correct (even if no one person is) and whenever new relevant information appears, the agents update their expectations appropriately. Note that it is not required that the agents be rational. EMH allows that when faced with new information, some investors may overreact and some may underreact. All that is required by the EMH is that investors' reactions be random and follow a normal distribution pattern so that the net effect on market prices cannot be reliably exploited to make an abnormal profit, especially when considering transaction costs (including commissions and spreads). Thus, any one person can be wrong about the market—indeed, everyone can be—but the market as a whole is always right. There are three common forms in which the efficient-market hypothesis is commonly stated—weak-form efficiency, semi-strong-form efficiency and strong-form efficiency, each of which has different implications for how markets work.
Weak-form efficiency[edit]
In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. This 'soft' EMH does not require that prices remain at or near equilibrium, but only that market participants not be able tosystematically profit from market 'inefficiencies'. However, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock markets to trend over time periods of weeks or longer[16] and that, moreover, there is a positive correlation between degree of trending and length of time period studied (but note that over long time periods, the trending is sinusoidal in appearance).[17] Various explanations for such large and apparently non-random price movements have been promulgated.
The problem of algorithmically constructing prices which reflect all available information has been studied extensively in the field of computer science.[18][19] For example, the complexity of finding the arbitrage opportunities in pair betting markets has been shown to be NP-hard.[20]
Semi-strong-form efficiency[edit]
In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.
Strong-form efficiency[edit]
In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strong-form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers."
this is correct for the purposes of my discussion credit goes to wikipida for the excert and i post this because i want to make sure we all know what EMH is.
AVT INVENIAM VIAM AVT FACIAM
  • #9
  • Dec 9, 2013 9:09am Dec 9, 2013 9:09am
Quoting GEfx
{quote} Hi Red. I only trade currencies, so perhaps random walk exists in other markets. It may exist at times in the forex, particularly during the time between fundamental announcements. But, given the structure of foreign exchange, and once a FA hits the news wires, the forex can become very predictable, and remain so until the impact of the FA is fully priced, which can take days/weeks/months. That is my experience as a trader. I think there is plenty of evidence to support that conclusion.

would you care post the sources of your evidence so I can read it, my friend?

You say "given the structure of the foreign exchange market" I want to make sure I understand your point, do you mean Market structure as central banks, tier 1,2,3 banks exchanging, dealing, trading, providing liquidity to global corps? if I understand you correctly by the lag in fully pricing in news that means that there are players that are late to the party as it were, and these players affect the supply/demand of a currency......would you be talking about Corps here?

what is the structure of the market to you? (so i can understand what you mean)

you say that the market is predictable around news releases, I am all ears here, do you mean the volatility or direction? would you care to elaborate?
AVT INVENIAM VIAM AVT FACIAM
  • #10
  • Dec 9, 2013 9:36am Dec 9, 2013 9:36am
Quoting the redlion
is it a lucky break? would you be able to continue to pick out charts repeatedly (this would be statistically significant)
I dunno. Test me again. And if you recall I said to you, honestly (if you believe me or not), that whatever recent chart you had decided to pick as your true chart would not be something I had seen because I had simply not been looking at any charts at all for quite sometime. I was not familiar with any recent, or semi-recent movements or anything. Whether anyone believes that or not is up to them.

There is a certain swagger and timing that the market tends to make, at least as far as I'm concerned, that 'random' charts don't tend to make or are otherwise a bit more tricky to fake with a forged chart.
Congratulations ScalaFX for coming out of the closet!
  • #11
  • Dec 9, 2013 9:40am Dec 9, 2013 9:40am
Quoting the redlion
{quote} would you care post the sources of your evidence so I can read it, my friend? You say "given the structure of the foreign exchange market" I want to make sure I understand your point, do you mean Market structure as central banks, tier 1,2,3 banks exchanging, dealing, trading, providing liquidity to global corps? if I understand you correctly by the lag in fully pricing in news that means that there are players that are late to the party as it were, and these players affect the supply/demand of a currency......would you be talking about...
Hi Red, the source of my evidence is -- me. My trading is based on my experience as a trader, my educational background in economics and finance, etc. As for market structure, there are two parts of market structure to consider. The first is the story the charts are telling you every day; the second involves who is in control of the market, and you identified them, with heavy emphasis on central banks (CB), tier 1 banks, and hedge funds. Forex is a heavily manipulated market, and those three groups do much of the manipulation. Often, the lag in pricing in FA is due to CB manipulation, since it is (usually) not in the best interest of a nation to see its currency jumping around all over the chart every day.

I did not say the market is predictable around news releases, but it is once the FA is released and the market begins to consider the implications of the news. I try to avoid entering new trades right after a FA, to avoid the craziness and volatility that often occurs after the FA. But, once things settle down, you can see/feel the professional traders take over and bring their order to the market.

As a retail trader, our view of all of this action/manipulation comes from the charts. The chart is your boss, and only it can tell you what to do. For me, I put all my faith in the charts (that is, my interpretation of the charts) while trading. Here is an example. I traded the AUD/USD for a while, then switched to the EUR/AUD when it became clear that the EUR was stronger than the USD, again based on FA:
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  • #12
  • Dec 9, 2013 10:25am Dec 9, 2013 10:25am
Quoting the redlion
{quote} the efficient-market hypothesis requires that agents haverational expectations
That's where EMT fails. Unless the markets are traded solely by robots then it will continue to be driven by human emotions and crowd behavior rather than fair price. There are hundreds of examples of bubbles in the history of markets, whether its tulips or bitcoins, humans get carried away and ignore the fundamental value of things - driven by a fear of missing out.

If you look at the tech bubble for example, fundamentally most of these companies were burning cash, had never made a profit in their history and had little in the way of a sound business plan; yet shortly before the crash they were trading for hundreds of millions each just because they were an internet company. Doesn't sound efficient to me.
  • #13
  • Dec 9, 2013 11:57am Dec 9, 2013 11:57am
Quoting -nate-dogg-
{quote} That's where EMT fails. Unless the markets are traded solely by robots then it will continue to be driven by human emotions and crowd behavior rather than fair price. There are hundreds of examples of bubbles in the history of markets, whether its tulips or bitcoins, humans get carried away and ignore the fundamental value of things - driven by a fear of missing out. If you look at the tech bubble for example, fundamentally most of these companies were burning cash, had never made a profit in their history and had little in the way of a...
Excellent post

Market's can never be truly efficient. EMH is modeled after a human being that psychology has shown not to exist. Actual human decision-making is less rational and more emotional than EMH can account for. This is a theory that can never explain euphoria and panic in the markets, because these are the offspring of human emotion. Not only that, our rationality itself is flawed unlike what EMH would lead us to believe. As a consequence it also can't deal with the fact that sometimes we still make irrational decisions, regardless of emotions.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #14
  • Dec 9, 2013 12:50pm Dec 9, 2013 12:50pm
I have several papers in my pc that show that markets aren't efficient, but unfortunately I can't upload them here. That theory is outdated by 20 years, when it was widely accepted. And that only happened because of the poor mathematical knowledge of economists. You can't expect much of them when it's about analyzing real data.
Markets exhibit chaos dynamics (see Lyupanov exponent test) and that has to do with the prices not being independent from the past prices (it's a time-series with memory - see Hurst exponent). Also something that shows markets aren't efficient are the fact that some assets are cointegrated with others (ie. there's a causation relationship). Also, there are bubbles, calendar anomalies and so on, that all refutes the efficiency of the market.
  • #15
  • Dec 9, 2013 1:29pm Dec 9, 2013 1:29pm
Quoting vox dei
{quote} Excellent post Market's can never be truly efficient. EMH is modeled after a human being that psychology has shown not to exist. Actual human decision-making is less rational and more emotional than EMH can account for. This is a theory that can never explain euphoria and panic in the markets, because these are the offspring of human emotion. Not only that, our rationality itself is flawed unlike what EMH would lead us to believe. As a consequence it also can't deal with the fact that sometimes we still make irrational decisions,...

this makes intuitive sense and would account for bubbles, as it has been pointed out. However have you ever made studies on autocorrelation (serial correlation) of returns of the instrument you are trading that indeed shows what you postulate?

there is an interesting paper http://www.technicalanalysis.org.uk/trend/Alex64.pdf

the debate is a lot more muddy than you purpot it to be, EMH is not totally false, and I think here is where the problem lies

Nubcake has indeed identified previous random walk brownian motion charts and by his reply I think the "swager" he refers to is shown in the distribution of returns, where a normal distrubution tends to be more uniform and the market's appears to be randomlike but with periods of higher volatility and periods of contracting volatility....


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AVT INVENIAM VIAM AVT FACIAM
  • #16
  • Dec 9, 2013 1:30pm Dec 9, 2013 1:30pm
Quoting Jasus
I have several papers in my pc that show that markets aren't efficient, but unfortunately I can't upload them here. That theory is outdated by 20 years, when it was widely accepted. And that only happened because of the poor mathematical knowledge of economists. You can't expect much of them when it's about analyzing real data. Markets exhibit chaos dynamics (see Lyupanov exponent test) and that has to do with the prices not being independent from the past prices (it's a time-series with memory - see Hurst exponent). Also something that shows markets...

great input, thanks for sharing
AVT INVENIAM VIAM AVT FACIAM
  • #17
  • Dec 9, 2013 6:33pm Dec 9, 2013 6:33pm
Quoting the redlion
{quote} you are right, you were able to pick out the Real Market chart amongs pseudo-randomly generated charts ( I use pseudo random because I do not think true randomness can be achieved specially not confining the randomness to parameters, the parameters I used was to obtain a random norlmally distributed return and in effect substracted or added to previous closing price) Here what interests me, HOW were you able to pick out such chart? is it a lucky break? would you be able to continue to pick out charts repeatedly (this would be statistically...
Let me suggest something. Lots of people start from (or after a while, end up at ) the assumption that the forex is not predictable, is random, and is chaotic. Instead, start from the position that the forex is, at times and under certain conditions, very predictable, and not random at all. Once you learn/understand market structure, you will recognize the start, and end, of patterns within the structure. This is the essence of the forex market. It's a representation of the processes that run and control foreign exchange, and currency control/management. Quite different from trading stocks or other assets.
  • #18
  • Dec 9, 2013 9:18pm Dec 9, 2013 9:18pm
Quoting the redlion
{quote} this makes intuitive sense and would account for bubbles, as it has been pointed out. However have you ever made studies on autocorrelation (serial correlation) of returns of the instrument you are trading that indeed shows what you postulate? there is an interesting paper http://www.technicalanalysis.org.uk/trend/Alex64.pdf the debate is a lot more muddy than you purpot it to be, EMH is not totally false, and I think here is where the problem lies Nubcake has indeed identified previous random walk brownian motion charts and by...
Hi redlion,

I have not made any studies as the ones you have mentioned. I am drawing my conclusions based on background in social psychology, 3.5 years short experience trading, and logic.

Have you considered the possibility that efficiency, which you take as evidence in favor of EMH, may alternatively be seen as the natural product of the competitive zero-sum nature of the markets? The later explanation is simpler, and has the potential to better accommodate certain gaps between fundamentals (information) and price.

Cheers
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #19
  • Dec 10, 2013 12:25am Dec 10, 2013 12:25am
Quoting the redlion
I am curious on what justification do any of us have to have accepted the assumption of price predictability and market innefficiency? Is it faith or hope that in fact innefficiencies exist in the market and that we are actually able to profit? or do we actually have evidence and sufficient reason to support the asumption of an inneficient forex market? In economics and finance it is often said that profit comes from information, a well informed investor is able to profit from temporary market inneficiencies or mispricing of certain assets, if in...
This is a really good question.. +1... Still thinking
Howlin' at the Moon on the Roof
  • #20
  • Dec 10, 2013 12:54am Dec 10, 2013 12:54am
Quoting -nate-dogg-
{quote} That's where EMT fails. Unless the markets are traded solely by robots then it will continue to be driven by human emotions and crowd behavior rather than fair price. There are hundreds of examples of bubbles in the history of markets, whether its tulips or bitcoins, humans get carried away and ignore the fundamental value of things - driven by a fear of missing out. If you look at the tech bubble for example, fundamentally most of these companies were burning cash, had never made a profit in their history and had little in the way of a...
Why dont u try to shift the money in ur Left pocket to Right pocket and then Right to Left, 1,000 times, 1,000,000 times.......... How much is the transection volume?
Market maker do this very often, that is.
Face both Win and Lose bravely
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