## Random Walk Theory

This is a discussion on Random Walk Theory within the General Trading Chat forums, part of the T2W Archive category; Originally Posted by FXSCALPER2 It is misleading to look at random charts and compare it to a random walk chart ...

Feb 12, 2008, 2:55pm   #33

Joined Jan 2007
Quote:
 Originally Posted by FXSCALPER2 It is misleading to look at random charts and compare it to a random walk chart like a coin toss because you really do not trade the random walk itself but the chart of the random walk which needn't be itself random.
But if the chart of the random walk was produced randomly, then you cannot trade it because the future walk cannot be predicted from its previous path. The previous path has no predictive value. You have an expectancy of zero. That's the whole point!

 Feb 12, 2008, 3:03pm #34 Joined Aug 2003 Perhaps if you guys were to explore the difference between randomness and unpredictability? Last edited by dbphoenix; Feb 12, 2008 at 8:48pm.
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 Feb 12, 2008, 3:58pm #35 Joined Jan 2006 People are making what philosophers call a 'category error'. It is said that the average person has 2.5 children. No one actually has 2.5 children, of course. Similarly, although a coin toss is a simple random walk, that randomness does disappear depending on what you are looking at. Your expectancy is zero only if you bet on each throw. What you can do is bet on frequency. If you get 10 heads in a row, for example, and each head means one pip up, it will take take a long time before the trend changes simply because it is more unlikely than likely in any time window for there to be ten tails so you can bet on an up trend using the beginning of the 10 head series as support. Incidentally, that is the reason why you see a trend in a randoom series. The fascinating thing is, if you actually look at the outcomes of each throw in the series that represents a trending chart of a coin toss experiment, it is highly likely that the frequency was close to 50:50. That looks paradoxical only if you do not separate in your head the individual outcomes from what you see on the chart. I am sure if you look at what actually happened in the day to day movement of the entire uptrend of the last seven years in EURUSD, the indvidual outcomes are much more evenly balanced than the monthly chart suggests.If you look tick by tick, you will probably end up with close to 50:50 up and down. The reason why you see a trend is because of clusters and they do happen in a random walk. __________________ Is life so dear that we should blame men for dying in adventure? Is there a better way to die?
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Feb 12, 2008, 4:28pm   #36

Joined Jan 2007
Quote:
 Originally Posted by FXSCALPER2 People are making what philosophers call a 'category error'. It is said that the average person has 2.5 children. No one actually has 2.5 children, of course. Similarly, although a coin toss is a simple random walk, that randomness does disappear depending on what you are looking at. Your expectancy is zero only if you bet on each throw. What you can do is bet on frequency. If you get 10 heads in a row, for example, and each head means one pip up, it will take take a long time before the trend changes simply because it is more unlikely than likely in any time window for there to be ten tails so you can bet on an up trend using the beginning of the 10 head series as support. Incidentally, that is the reason why you see a trend in a randoom series. The fascinating thing is, if you actually look at the outcomes of each throw in the series that represents a trending chart of a coin toss experiment, it is highly likely that the frequency was close to 50:50. That looks paradoxical only if you do not separate in your head the individual outcomes from what you see on the chart. I am sure if you look at what actually happened in the day to day movement of the entire uptrend of the last seven years in EURUSD, the indvidual outcomes are much more evenly balanced than the monthly chart suggests.If you look tick by tick, you will probably end up with close to 50:50 up and down. The reason why you see a trend is because of clusters and they do happen in a random walk.

The further away you put it, the less chance you have of your stop being hit before your position moves into profit. So more of your trades will win. Unfortunately your losses will be bigger, so this doesn't change your expectancy which remains 0.

Feb 12, 2008, 5:15pm   #37
Joined Feb 2004
Quote:
 Originally Posted by dbphoenix Randomness is an objective property. Nevertheless, what appears random to one observer may not appear random to another observer who has the key needed to turn the sequence of bits into a readable message.
Sorry, but randomness is NOT a subjective property. There might be issues in not getting enough data to, how shall we put it, say with a 98% confidence interval that the data is random. There are objective measures we can use to put the data to that test.

I suppose in this sense, practically speaking anyway, that you can never be able to prove that something is random because you do not have infinite data for you to put through your objective measures.

Feb 12, 2008, 5:18pm   #38

Joined Aug 2003
Quote:
 Originally Posted by temptrader Sorry, but randomness is NOT a subjective property. There might be issues in not getting enough data to, how shall we put it, say with a 98% confidence interval that the data is random. There are objective measures we can use to put the data to that test. I suppose in this sense, practically speaking anyway, that you can never be able to prove that something is random because you do not have infinite data for you to put through your objective measures.
What I quoted did not say that randomness is a subjective property; it said the opposite. It then addressed what appears to be random but may in fact not be.

Feb 12, 2008, 5:19pm   #39

Joined Nov 2003
Quote:
 Originally Posted by theroguetrader who " really " believes this...?
Nah!
Its an auction. How can an auction be random!?
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Feb 12, 2008, 6:02pm   #40
Joined Feb 2004
Quote:
 Originally Posted by dbphoenix What I quoted did not say that randomness is a subjective property; it said the opposite. It then addressed what appears to be random but may in fact not be.
terribly sorry, must have been dyslexic there for a minute.