Random Walk Theory

temptrader · Feb 12, 2008, 12:07pm

Quote:

Originally Posted by new_trader

Why would I care about what you say anyway? You make idiotic assertions like "a market is nothing but the sum of it's constituting participants, each of whom has his own agenda, doing his own thing." and almost in the same breath say

"Next time someone tells you they have a great new system thats gonna beat the markets just give Gamma Jammer a call and tell him to sell one billion worth of EUR/USD while watching your friends pipe dream go up in smoke."

So, could you sell billion worth of EUR/USD ? I couldn't. So, what does that tell you about all the participants?

Let me ask you something, what would you do if Gamma Jammer called you and said he was going to sell one billion worth of EUR/USD in the next 5 minutes?

LOL!!!! There was a chapter in Pit Bull by Marty Schwartz (I don't actually like the guy just in case you are wondering, think his character is utter reprehensible), where he meets Paul Tudor Jones and other traders and they got round and talked about oil. The next day or so something is acting funny on the oil prices, and at the end Marty realised it was because what was going in the meeting before.

Hey, BSD, you're out of line.

dbphoenix · Feb 12, 2008, 12:08pm

Quote:

Originally Posted by temptrader

terribly sorry, must have been dyslexic there for a minute.

No problem. We're all subject to the occasional brain fart.

BSD · Feb 12, 2008, 12:25pm

Quote:

Originally Posted by temptrader

LOL!!!! There was a chapter in Pit Bull by Marty Schwartz, where he meets Paul Tudor Jones and other traders and they got round and talked about oil. The next day or so something is acting funny on the oil prices, and at the end Marty realised it was because what was going in the meeting before.

Yup, Marty said at the get together that he was bullish on oil.

That night, which was the evening traders dinner at the then Commodity Corp that was eventually taken over by Goldman Sachs, oil was at $12.50 / barrel.

During dinner Marty gave his bullish assessment on oil to all present.

There was like 50% of the then hedge fund money at the time in that room, what with people like Tudor Jones, Bruce Kovner and Michael Marcus attending.

Next day, immediately upon the open, oil started climbing all the way up to $15 / barrel that day.

Quote:

Originally Posted by dbphoenix

No problem. We're all subject to the occasional brain fart.

firewalker99 · Feb 12, 2008, 1:37pm

Quote:

Originally Posted by dbphoenix

Perhaps if you guys were to explore the difference between randomness and unpredictability?

Often a system/event/phenomenon will show a characteristic randomness on a microscopic level, but predictableness on a macroscopic level.

If I throw a dice, I have no idea what it will be (random). But if I throw 1000 dices, I can predict (to a certain degree) how many 6's I'll end up with.

arabianights · Feb 12, 2008, 1:51pm

Sure, but you wouldn't be able to tell what the next coin flip would be. A random walk doesn't mean every price is random, it means every price movement is random, although ultimately following a distribution, usually gaussian.

One of the stupidist things that academics who believe in random walks on the markets do is to de trend them, but then give no justification for the trend itself! You can come up with mathematical justifications for doing this but they are ultimately self defeating.

new_trader · Feb 12, 2008, 2:22pm

Quote:

Originally Posted by firewalker99

Often a system/event/phenomenon will show a characteristic randomness on a microscopic level, but predictableness on a macroscopic level.

If I throw a dice, I have no idea what it will be (random). But if I throw 1000 dices, I can predict (to a certain degree) how many 6's I'll end up with.

How many 6's will you end up with if you threw 1000 diceseseses?

temptrader · Feb 12, 2008, 3:36pm

Quote:

Originally Posted by firewalker99

Often a system/event/phenomenon will show a characteristic randomness on a microscopic level, but predictableness on a macroscopic level.

If I throw a dice, I have no idea what it will be (random). But if I throw 1000 dices, I can predict (to a certain degree) how many 6's I'll end up with.

That's the binomial distribution, and since we have 1000 dices unfortunately we need to approximate using the Poisson distribution.

No, you can only probabilistically predict. The possibility of having NO 6s at all is still there.

Forgot to add: FW is referring here to the disparity in the probabilities. Here we have 5 times more chance of NOT getting a 6 than getting a 6. This means that the probability distribution curve will be skewed to a "favourable" range.

firewalker99 · Feb 12, 2008, 4:06pm

Quote:

Originally Posted by new_trader

How many 6's will you end up with if you threw 1000 diceseseses?

Quote:

Originally Posted by temptrader

No, you can only probabilistically predict. The possibility of having NO 6s at all is still there.

I'm not sure where this is going, but I can't tell how many 6's one will end up with.

I can only make a statement like "there's a xx% chance that you will have at least yy 6's" or "there's a xx% chance the amount of sixes lies in the interval [a, b]".

So, yes new_trader and temptrader I agree.

Feb 12, 2008, 1:51pm	#45
arabianights Legendary Member Member Since Jan 2007 6,782 Posts	Re: Random Walk Theory Sure, but you wouldn't be able to tell what the next coin flip would be. A random walk doesn't mean every price is random, it means every price movement is random, although ultimately following a distribution, usually gaussian. One of the stupidist things that academics who believe in random walks on the markets do is to de trend them, but then give no justification for the trend itself! You can come up with mathematical justifications for doing this but they are ultimately self defeating.

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