Another Scose type question thread

[scose-no-doubt]

Random Walk vs Reflexivity vs *insert your own*

To which do you subscribe?
Pros/Cons, Agree/Disagree, Observations etc
Anything really.

Start your engines.


Note: I don't need the thread hijacked by people who wish to post off topic remarks such as "you're wasting your time, Scose!", "you'll never make money!" etc etc

 

[Hotch]

Got to have your drift parameter!

 

[robster970]

I go for the voting machine (short term, tending to random) vs weighing machine (long term, tending to directional).

 

[scose-no-doubt]

@ Hotch

Clear as mud.

You saying RW or you saying your choice is dependant on the drift parameter? :/

 

[the hare]

It doesnt really matter, but I will say this, until you pick one, and fully commit to it you'll struggle to develop any sort of coherent mental model that you can exploit.

FWIW, I subscribe to the drunken man being pulled by a dog type model

 

[scose-no-doubt]

I'm just interested in what you guys think is all. Can't exactly discuss this type of thing with my friends or my girl.

 

[Shakone]

A random walk with drift, but that drift switches from positive to negative or low to high etc, plus some reflecting barriers placed at particular points.

 

[scose-no-doubt]

I not sure the two are mutually exclusive... if most participants deal in random walk :\

 

[Pat494]

Rational, logical, well planned are some of the words that leap to mind to cut down the variables.

Random walk is no better than a bum with a skinful. Almost certain to fall.

 

[Hotch]

@ Hotch

Clear as mud.

You saying RW or you saying your choice is dependant on the drift parameter? :/

It was my interpretation that the random walk doesn't have a drift parameter, perhaps I am mistaken.

 

[scose-no-doubt]

Don't think it does but a I think a lot of people subscribe it after the fact

 

[arabianights]

markets are order driven... everything follows from that... think about it

most of the time the orders are essentially random, so it's a random walk

but people know they'll even out, if nothing is happening. so they can implement mean reversion strategies if the walk goes too far

but then if something has happened, the imbalance is likely to continue... so then we trend, partially in anticipation of further trending

etc etc etc

 

[scose-no-doubt]

How long do you hold for?

 

[arabianights]

depends....

 

[scose-no-doubt]

Well if people are only holding for a short time based on random walk and the order book...

 

[amit1986]

Markets (maybe more so for U.S. stocks and less for forex) are anything but a random walk...all these things are great for academics and textbooks because these theories are solid assumptions behind many finance models, but in reality, markets are not a random walk...they are driven purely by emotion and greed, and that is evident in the first few minutes of trading.

 

[scose-no-doubt]

Markets (maybe more so for U.S. stocks and less for forex) are anything but a random walk...all these things are great for academics and textbooks because these theories are solid assumptions behind many finance models, but in reality, markets are not a random walk...they are driven purely by emotion and greed, and that is evident in the first few minutes of trading.

what about emh?

 

[arabianights]

what about it?

 

[amit1986]

EMH, especially the strong and medium versions, is also garbage. In the case of the EMH, most academics also don't really believe in it, unlike the random walk hypothesis.

It may be the case that the weak version could hold in certain markets (I believe it holds in the forex market), but think about this:

The EMH basically states that markets are efficient and if profit opportunities arise, they'll be taken advantage off until they disappear.

The random walk theory basically states that prices in whatever financial instrument you trade cannot reveal a trend. This is basically an extension of the EMH because if they could reveal trends, then this profit opportunity would disappear soon by the smart money.

But, ask yourself, why are you here? Why are you on T2W? Chances are the answer is the same as many others on T2W: to learn how to consistently profitable as a trader. Consistency requires an edge. This edge, if it exists, completely refutes both the EMH and RW because someone who is able to wake up everyday and rake in profits by using their edge has basically identified an inefficiency in the market.

So, if you honestly believe any of the EMH or RW hold in the markets, then it's pointless to be trying to learn how to trade.

 

[scose-no-doubt]

How can some markets be more driven by greed than others unless said markets exhibit weaker EMH and wouldn't that just negate the whole idea?