Random Walk Theory

This is a discussion on Random Walk Theory within the General Trading Chat forums, part of the Reception category; Originally Posted by FXSCALPER2 People are making what philosophers call a 'category error'. It is said that the average person ...

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Old Feb 12, 2008, 4:28pm   #36
 
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Originally Posted by FXSCALPER2 View Post
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.
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Old Feb 12, 2008, 5:15pm   #37
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Originally Posted by dbphoenix View Post
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.
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Old Feb 12, 2008, 5:18pm   #38
 
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Originally Posted by temptrader View Post
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.
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Old Feb 12, 2008, 5:19pm   #39
 
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Originally Posted by theroguetrader View Post
who " really " believes this...?
Nah!
Its an auction. How can an auction be random!?
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Old Feb 12, 2008, 6:02pm   #40
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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.
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Old Feb 12, 2008, 6:07pm   #41
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Originally Posted by new_trader View Post
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.

Last edited by temptrader; Feb 12, 2008 at 6:19pm.
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Old Feb 12, 2008, 6:08pm   #42
 
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Originally Posted by temptrader View Post
terribly sorry, must have been dyslexic there for a minute.
No problem. We're all subject to the occasional brain fart.
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