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Random Price Movement

  • #41
  • Aug 31, 2006 9:43am Aug 31, 2006 9:43am
What math are you basing this opinion on. All one has to do is take advantage of very short term inefficiencies in price action. If the market is random, it will reach equilibrium over a very large sample. However there are several opportunities in the short term, because Heads or tails can run often in a row, causing inbalances and inefficiencies.




Quoting raistin
If market is truly random, there is no way you can make money. Does not matter psychics, money management or whatever. What is more, you could lose money becasue of brokers spread.
  • #42
  • Aug 31, 2006 1:59pm Aug 31, 2006 1:59pm
This is a great post and makes 1 think outside the box. Iam personally pissed off with all these somebodies systems etc on FF, which are of no interest to a trader like me. Its exteremly boring seeing all these posts, its too easy to post on this site, maybe the standards should be raised.

Good on phil for talking about the dirty subject of MM and randomness, but this does not mean he should get his own group...... Iam always watching this space.....


boycie
  • #43
  • Aug 31, 2006 2:13pm Aug 31, 2006 2:13pm
I am also fascinated by this topic of randomness in the markets. Taleb's "Fooled by Randomness" is an excellent read in this respect.

Van Tharp in TYWTFF makes some good points as well:

As you’ll see in the next chapter on entry, very few entry techniques beat a simply random entry-a coin flip at a random time to determine whether to go long or short in the market. Consequently you need to do whatever you can to improve your odds. The best way of improving your odds is to make sure the market is moving in the direction you are expecting before you enter the market. This is basically your timing signal. We’ll be discussing a number of significant timing signals in Chapter 10.

And then later on:

TRYING TO BEAT RANDOM ENTRY

I was doing a seminar with Tom Basso (see his sections in Chapters 3 and 5) in 1991. Tom was explaining that the most important part of his system was his exits and his position-sizing algorithms. As a result, one member of the audience remarked, “From what you are saying it sounds like you could make money consistently with a random entry as long as you have good exits and size your positions intelligently.”

Tom responded that he probably could. He promptlv returned to his office and tested his own system of exits and posltlon sizing with a “coin flip”-type entry. In other words, his system simulated trading four different markets and he was always in the market, either long or short, based upon a random signal. As soon as he got an exit signal, he’d reenter the market again based upon the random signal. Tom’s results showed that he made money consistently, even using $100 per contract for slippage and commissions.

We subsequently duplicated those results with more markets.

I published them in one of my newsletters and gave several talks on them. Our system was very simple. We determined the volatility of the market by a lo-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1 percent risk model for our position-sizing system,as described in Chapter 12.

That’s it! That’s all there was to the system-a random entry, plus a trailing stop that was three times the volatility, plus a 1 percent risk algorithm to size positions. We ran it on 10 markets. And it was always in each market, either long or short, depending upon a coin flip. It’s a good illustration of how simplicity works in system development.

Whenever you run a random entry system, you get different results. This system made money on 80 percent of the runs when it only traded one contract per futures market. It made money 100 percent of the time when a simple 1 percent risk money management system was added. That’s pretty impressive. The system had a reliability level of 38 percent, which is about average for a trend following system.


All though these experiments are by no means conclusive, it does highlight some of the points made earlier, so maybe coin-flipping ain't so bad after all!

I stumbled across this recent article as well:
  • #44
  • Aug 31, 2006 2:29pm Aug 31, 2006 2:29pm
Btw. there is another thread on randomness here. It kinda ran out of steam (maybe it was my posts that killed it off)...hope that doesn't happen here!
  • #45
  • Aug 31, 2006 3:03pm Aug 31, 2006 3:03pm
Iso,

Tell me something I dont know. back to the good posts....

boycie
  • #46
  • Aug 31, 2006 3:25pm Aug 31, 2006 3:25pm
Quoting boycie
This is a great post and makes 1 think outside the box. Iam personally pissed off with all these somebodies systems etc on FF, which are of no interest to a trader like me. Its exteremly boring seeing all these posts, its too easy to post on this site, maybe the standards should be raised.

Good on phil for talking about the dirty subject of MM and randomness, but this does not mean he should get his own group...... Iam always watching this space.....


boycie
boycie,

Thanks for your compliment. All I can hope for is for someone to stop and scratch their head and question if they are "good" or they just happen to be in the right place at the right time.

As for posting, there is no admission test and some seem to enjoy seeing their name on the internet. To be honest, it's why I don't stop by here all that often. I get a little frustrated that some crap system gets 70,000 views and then something like money management that makes a difference gets 700.

By the way, I don't want my own group. Every time I post on here I fall further behind on my own testing. As soon as this market starts moving again I will too.

Phil
  • #47
  • Aug 31, 2006 3:38pm Aug 31, 2006 3:38pm
Quoting Isotonic
I am also fascinated by this topic of randomness in the markets. Taleb's "Fooled by Randomness" is an excellent read in this respect.

Van Tharp in TYWTFF makes some good points as well:

As you’ll see in the next chapter on entry, very few entry techniques beat a simply random entry-a coin flip at a random time to determine whether to go long or short in the market. Consequently you need to do whatever you can to improve your odds. The best way of improving your odds is to make sure the market is moving in the direction you are expecting before you enter the market. This is basically your timing signal. We’ll be discussing a number of significant timing signals in Chapter 10.

And then later on:

TRYING TO BEAT RANDOM ENTRY

I was doing a seminar with Tom Basso (see his sections in Chapters 3 and 5) in 1991. Tom was explaining that the most important part of his system was his exits and his position-sizing algorithms. As a result, one member of the audience remarked, “From what you are saying it sounds like you could make money consistently with a random entry as long as you have good exits and size your positions intelligently.”

Tom responded that he probably could. He promptlv returned to his office and tested his own system of exits and posltlon sizing with a “coin flip”-type entry. In other words, his system simulated trading four different markets and he was always in the market, either long or short, based upon a random signal. As soon as he got an exit signal, he’d reenter the market again based upon the random signal. Tom’s results showed that he made money consistently, even using $100 per contract for slippage and commissions.

We subsequently duplicated those results with more markets.

I published them in one of my newsletters and gave several talks on them. Our system was very simple. We determined the volatility of the market by a lo-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1 percent risk model for our position-sizing system,as described in Chapter 12.

That’s it! That’s all there was to the system-a random entry, plus a trailing stop that was three times the volatility, plus a 1 percent risk algorithm to size positions. We ran it on 10 markets. And it was always in each market, either long or short, depending upon a coin flip. It’s a good illustration of how simplicity works in system development.

Whenever you run a random entry system, you get different results. This system made money on 80 percent of the runs when it only traded one contract per futures market. It made money 100 percent of the time when a simple 1 percent risk money management system was added. That’s pretty impressive. The system had a reliability level of 38 percent, which is about average for a trend following system.


All though these experiments are by no means conclusive, it does highlight some of the points made earlier, so maybe coin-flipping ain't so bad after all!

I stumbled across this recent article as well:
ISO,

Both of those books are excellent and have been very influential on my development as a trader. Great suggestions. The article you suggested is right on the money and suggests that much of what has been discussed here is valid.

An interesting experiment to see just how accurate your system is (independent of exits) is to set a timed exit as a companion to your entry. For example, I have a system that does quite well but is only 53% accurate over the last 120 trades. If I set an auto exit after 5 candles the % winners drop to 39% (meaning it is + pips at the end of the 5th candle). Not terribly impressive and yet it has consistently performed well for 4 straight years.

One of the first and best books I read was called "Trading as a Business" by Charlie Wright. He stated that the best entry systems are rarely over 55% accurate (when tested with a fixed time exit). To be honest, I have never beaten that number.

In golf they say "Drive for show and putt for dough". It's the same for trading. Any yahoo can enter a position (drive), it's the money management and exits that bring it home.

Thanks again for all the relevant information and research that you posted.

Phil
  • #48
  • Aug 31, 2006 3:47pm Aug 31, 2006 3:47pm
There are so many variables to take into consideration when trading. So much so that price action does seem completely random, but I simply don't believe that to be the case. This is a market we are dealing with people, it is goverened by the laws of supply and demand. Or do you think it was a coincidence that the dollar strengthened along with nearly two consective years of interest rate hikes?
  • #49
  • Aug 31, 2006 3:53pm Aug 31, 2006 3:53pm
SC, again, you are mixing up several topics. Phil's discussion was that a random chart produces the same types of patterns. In fact he has already stated that there is an effect on real markets of supply, demand, greed, fear and so on. The actual point is that why waste time trying to figure out why a market moved a minute amount. Random charts can do the same thing.

This is all clearly laid out in the posts..


Quoting SisterCurare
There are so many variables to take into consideration when trading. So much so that price action does seem completely random, but I simply don't believe that to be the case. This is a market we are dealing with people, it is goverened by the laws of supply and demand. Or do you think it was a coincidence that the dollar strengthened along with nearly two consective years of interest rate hikes?
  • #50
  • Aug 31, 2006 3:54pm Aug 31, 2006 3:54pm
Quoting SisterCurare
There are so many variables to take into consideration when trading. So much so that price action does seem completely random, but I simply don't believe that to be the case. This is a market we are dealing with people, it is goverened by the laws of supply and demand. Or do you think it was a coincidence that the dollar strengthened along with nearly two consective years of interest rate hikes?
Sister, I'm not hear to make you believe. (Bad joke but I thought is was funny).

The EURUSD is at the same level now as it was in October, 2004. Where's the dollar strength that you speak of?

This isn't about supply and demand. Of course, people buy and sell. The question at hand is what convinces them to buy and sell.
  • #51
  • Aug 31, 2006 4:02pm Aug 31, 2006 4:02pm
So, what you're getting at here is that those same patterns we see in charts that traders use to base trading decisions on, can be reproduced at random and there is no underlying meaning to these patterns?
  • #52
  • Aug 31, 2006 4:08pm Aug 31, 2006 4:08pm
Yup, with the exception of the self fulfilling prophecy of the herd mentality...

The best one can do is try to ride in the direction of the herd.

I may be wrong, but have done very well with this attitude... Thanks Scott

BTW, This is what makes Money management so absolutely important.
  • #53
  • Aug 31, 2006 4:10pm Aug 31, 2006 4:10pm
Quoting SisterCurare
So, what you're getting at here is that those same patterns we see in charts that traders use to base trading decisions on, can be reproduced at random and there is no underlying meaning to these patterns?
That is 100%, without a doubt, absolutely the point I'm trying to make. I'm not saying the market is totally random. But if you click that "flip coin" button a few times you can make every pattern you've ever been taught. The point is to stop wasting your time trying to figure out why something moved and figure out how your system could be positioned to participate in that move.

Out of curiosity, did you actually try the spreadsheet?

If you would prefer to spend a little money I would suggest the Encyclopedia of Chart Patterns by Thomas Bulkowski. He tested just about every popular chart pattern known to traders and rarely did one result in more than a 50% accuracy.

Phil
  • #54
  • Aug 31, 2006 4:11pm Aug 31, 2006 4:11pm
I think those patterns, pennants, flags, triangles, do indeed have meaning and the fact that you can reproduce them at random means simply that you can produce them at random. In fact, if you wanted to you could probably produce a number of charts of any time frame of the future at random, and there would be a very strong possibility that the reality, once the future is realized, would resemble one of those charts. What would that prove?

I feel the same way about reproducing random charts of past price action. What does it prove?
  • #55
  • Aug 31, 2006 4:14pm Aug 31, 2006 4:14pm
Quoting philmcgrew
Out of curiosity, did you actually try the spreadsheet?
Phil
I did download the spreadsheet but I was afraid to run it because I got hit with a nasty virus through a macro exploit in MS Office in the past.
  • #56
  • Aug 31, 2006 4:18pm Aug 31, 2006 4:18pm
Quoting smjones
Yup, with the exception of the self fulfilling prophecy of the herd mentality...

The best one can do is try to ride in the direction of the herd.

I may be wrong, but have done very well with this attitude... Thanks Scott

BTW, This is what makes Money management so absolutely important.
Now, don't get me wrong here, it took me a year to realize that it is best to trade with the trend, I don't rely on chart patterns, but I do believe there is valuable information in those patterns. I would not create a system around them, but there is some information there. I don't think they are meaningless.
  • #57
  • Aug 31, 2006 4:22pm Aug 31, 2006 4:22pm
You know that is interesting you should say this, because a few posts back Phil pointed out a very nice H&S pattern and then I showed that using the price projection one would have made a nice profit from this chart. It was completely random, however with a good stop and good money management, this H&S would have yielded a real profit from a random event.



Quoting SisterCurare
I think those patterns, pennants, flags, triangles, do indeed have meaning and the fact that you can reproduce them at random means simply that you can produce them at random. In fact, if you wanted to you could probably produce a number of charts of any time frame of the future at random, and there would be a very strong possibility that the reality, once the future is realized, would resemble one of those charts. What would that prove?

I feel the same way about reproducing random charts of past price action. What does it prove?
  • #58
  • Aug 31, 2006 4:29pm Aug 31, 2006 4:29pm
Quoting SisterCurare
I think those patterns, pennants, flags, triangles, do indeed have meaning and the fact that you can reproduce them at random means simply that you can produce them at random. In fact, if you wanted to you could probably produce a number of charts of any time frame of the future at random, and there would be a very strong possibility that the reality, once the future is realized, would resemble one of those charts. What would that prove?

I feel the same way about reproducing random charts of past price action. What does it prove?
The patterns have meaning but is it inherent or do they have meaning because we as a collective have applied meaning to them?

And then, does it even matter? Phil pointed out that testing those patterns rarely yeilds better than 50% accuarcy. That's still more than enough to be profitable. Provided of course proper R:R and money management is maintained.
Secret Identity: Bill Sullivan
  • #59
  • Aug 31, 2006 4:30pm Aug 31, 2006 4:30pm
Quoting SisterCurare
I think those patterns, pennants, flags, triangles, do indeed have meaning and the fact that you can reproduce them at random means simply that you can produce them at random. In fact, if you wanted to you could probably produce a number of charts of any time frame of the future at random, and there would be a very strong possibility that the reality, once the future is realized, would resemble one of those charts. What would that prove?

I feel the same way about reproducing random charts of past price action. What does it prove?
I'm going to go Zen on you....Lao Tzu, a 6th century BC philosopher said

"Those who have knowledge, don't predict. Those who predict, don't have knowledge." Wise words that stand true 2600 years later.

Buy Bulkowski's book if you want to see the statistical accuracy of your beloved chart patterns.

Phil
  • #60
  • Aug 31, 2006 4:53pm Aug 31, 2006 4:53pm
Quoting philmcgrew
I'm going to go Zen on you....Lao Tzu, a 6th century BC philosopher said

"Those who have knowledge, don't predict. Those who predict, don't have knowledge." Wise words that stand true 2600 years later.

Buy Bulkowski's book if you want to see the statistical accuracy of your beloved chart patterns.

Phil
I agree with you here. It took me a year, but I finally stopped trying to pick tops and bottoms, ie, predict. Now I simply follow price and go where it leads.
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