Markets and mysticysm

[rols]

What is it about the "nature" of the markets that make it impossible to predict?

If I knew that mate I'd be able to give you the answer...

Now take a look at the DJIA since it started.

The markets are easy to predict. It's us people that make it so difficult...

 

[Rhody Trader]

The markets are easy to predict. It's us people that make it so difficult...

I would argue that people are what makes the market predictable. It is their actions and reactions that drive prices.

 

[new_trader]

Contribution to profitability:

Discipline: 50%
Risk taking: 40%
Luck: 10%
Effort to predict: 0% in the longer term

I disagree with this breakdown because trading is a process involving synergism.

 

[alexander]

What is it about the "nature" of the markets that make it impossible to predict?

I wonder why you are asking such a question?

Can you predict what fund managers, company insiders, the Economy, or anyone else involved, including terrorists and the same, will do tomorrow or even a week from today or a year?

However claims the markets are predictable the burden of proof is on him. They all fails, sooner or later, just like astrologers or other sorcerers.

Markets reward discipline and risk taking coupled with a bit of luck. Markets punish self-proclaimed prophets.

Alex

 

[new_trader]

I wonder why you are asking such a question?

Can you predict what fund managers, company insiders, the Economy, or anyone else involved, including terrorists and the same, will do tomorrow or even a week from today or a year?
Alex

No, I can't. But that is different (apart from terrorism) to recognising what they are doing now.

 

[Profitaker]

naturally that would be your opinion as its the majority thought
the markets are not random they are structured in such a way as to appear random
my statement was expressing a point as you see it and the final point was as i see it do you see now

Actually Andy, the majority believe, just like you, that the markets are predictable.
This is precisely why the markets are unpredictable. Surprised ?

The minority believe that all available information is reflected in a stock price and therefore future stock price moves are dependant on news flow and since news can’t be predicted, neither can future stock prices.

For all things to be known in advance, you do not necessarily have to know exactly and precisely what will happen – you just need to be aware of the range of possibilities and the degree of probability appropriate to each of these possibilities. Then indeed, all things are known in advance. All of them. Every single possibility. And in knowing that, is the security in knowing you have prepared a plan of action (or inaction) to respond to the development of any one of these possibilities into your reality.

I certainly agree that all probabilities should be known in advance, that and having a plan of action in the event of xyz is much more profitable than trying to predict the market using candlestick, or tea leaves.But I don't think that was what was meant by the originator of the phrase.

 

[andycan]

Markets are predictable certainly from where im standing
they have a structure which repeat over and over its not about knowing what funds are doing they are the result of the collective. the next point metioned would be news, how can you accouint for that? its rather smple, you see, a market has a destination, that destination has to be achieved, whether to attract more buyers or for institutions to unload, that market will achieve its objective the news will just speed or slow it down thats all
its understanding that a market over a period of time will display a habitual order, there is a rhythm to all markets. its been said that predicting does not make you money, this is very true many cannot predict what markets are doing, i make a living out of knowing where the market is going, this for me serves as a road map once i have identified the low or high then i agressively trade in the direction of the upcoming trend, if the low is identified in the higher time frames then via lower time frames i can usually pin point where to cover and re enter on a correction.
kind of like having an A-Z, there can be many routes to a destination but if you know where its ending then irrespective of the route the markets decides to take you just go along for the ride.

 

[Profitaker]

Andy

It is news (either on a macro or micro level) that drives a stock price up or down, and everything is correlated.

Your belief of personal predictability is typical of the majority.

 

[new_trader]

Andy

It is news (either on a macro or micro level) that drives a stock price up or down, and everything is correlated.

Your belief of personal predictability is typical of the majority.

And who drives the news?

 

[alexander]

No, I can't. But that is different (apart from terrorism) to recognising what they are doing now.

"Now" is very different from predicting the future. Some astrologers become famous because during their lifetime they were lucky and they had a good streak of winners. Had they lived long enough, eventually their guesses would account 50/50, right/wrong.

Some others had no luck in their side and had a streak of losers right at the start. The exact same thing holds for economists, fund managers, etc. Those you hear are the best performers have luck on their side, plus discipline and take risks. No predictions add to their performance in a fundamental way. It's pure luck. Markets are unpredictable.

Alex

 

[new_trader]

Markets are unpredictable.

OK. But to me, that opinion is inconsistent with reason, logic and simple arithmetic.

 

[Profitaker]

And who drives the news?

Nobody "drives" news. News is the name given to communicating events or situations which affect the future profitability of the stock, either on a macro or micro level.

Anybody that claims to be able to predict the market by inference also claims they can predict future news and events. Maybe they can, I've just never seen it.

 

[Rhody Trader]

The minority believe that all available information is reflected in a stock price and therefore future stock price moves are dependant on news flow and since news can’t be predicted, neither can future stock prices.

Ah, Efficient Market Theory.

There'sa reason that's a minority view. It's crap. Even the academics who have clung to it for decades are starting to let it go.

There is absolutely no way that all available information is reflected in prices for the simple reason that not everyone who would base trading decisions on the information has it. For example, I might find it very important information to know that Buffett is buying ABC stock, but unless I'm actually in a position to see Buffett doing the buying, I won't know about it until after the fact. There's just way too much information out there that traders don't know at any given time. Keep in mind that the forecasts and expectations of other traders must be included in the mix of avialable information and there's no way we can know all that.

I will certainly admit that markets, especially the most actively traded ones, are mostly efficient. People, though, do not always react rationally even when they have all the available information, which is another breakdown in the efficiency theory.

To me it is more correct to say that prices reflect the aggregated actions, to date, of market participants as they interpret the information they have received and make decisions.

 

[new_trader]

To me it is more correct to say that prices reflect the aggregated actions, to date, of market participants as they interpret the information they have received and make decisions.

But what about the inequality of market participants?

 

[Rhody Trader]

Nobody "drives" news. News is the name given to communicating events or situations which affect the future profitability of the stock, either on a macro or micro level.

That's a fairly narrow definition of news. There's a lot more to it than that, but I think we get your point.

Anybody that claims to be able to predict the market by inference also claims they can predict future news and events. Maybe they can, I've just never seen it.

Predicting the market is not about predicting events, but rather the reaction to those events. Reactions are much easier to guage. But then you start getting in to the question of timeframes, I suppose.

 

[Rhody Trader]

But what about the inequality of market participants?

What about it?

 

[Profitaker]

If you had some privileged information (Buffet buying) or insider information (Buffet about to bid) then clearly you’d have an element of predictability. But that does not mean that markets aren’t efficient. Indeed staunch advocates of the efficient market theory would argue that even inside information is reflected in the stock price because those with the information would have driven the stock price up to a level where they believe the market will price in the forthcoming information.

Predicting the market is not about predicting events, but rather the reaction to those events.

How exactly can you predict a reaction to an event unless you can first predict the event ?

 

[andycan]

Andy

It is news (either on a macro or micro level) that drives a stock price up or down, and everything is correlated.

Your belief of personal predictability is typical of the majority.

Hi Profitaker

let me explain im not talking about looking at the ftse and saying 'oh that sucker is going up' and someone says 'yes but where?'
and the person answers ' oh phew maybe a couple of hundred points'
takes a look a few days/weeks later and turns to the chap and says 'see told you it was going up'
thats the predictability most think of, thats not what im talking about
if everyone does what i do then absolutely great im truely happy for them
but i know they dont and that does not make me part of the majority and if it did and all involved made a shed load of money then we are all in heaven right?
im talking a method that works for me a method that allows me to know what the markets are doing how and why, but experience and understanding markets is also a major factor i could not show this to a toatal biginner and expect him to be on par with me.
we all have different beliefs what drives the markets, news moves markets indeed, but fundamentally we think different to how its involved in markets
if you have ever traded bonds which is far more sensitive to news most will know that even good news can make the market drop several handles and visa versa
if the big boyz are all in to buy and make a killing i assure no news in the world will drop it to an uncomfortable level
the stockmarkets is going up and the US economy is screwed !!
the charts reflects exactly the intent of the pros and thats to make money sell at the highs and suck joe public to buy the shares they have just dumped

 

[Rhody Trader]

...Indeed staunch advocates of the efficient market theory would argue that even inside information is reflected in the stock price because those with the information would have driven the stock price up to a level where they believe the market will price in the forthcoming information.

Those stuanch supporters are very few and far between. Even 15 years ago when I was a finance student my profs were saying that strong form EMT, which is the one that says insider information is accounted for, was not widely accepted. There are two major reasons for that. First, insider trading is illegal. Second, insiders don't necessarily have the funds to drive prices. Some may, sure, but not all of them. There's only so many shares one can buy or sell.

How exactly can you predict a reaction to an event unless you can first predict the event ?

Reactions can be one sided. In a bull market, bad news is often ignored and good news seen as an excuse to buy even more. If you have a feel for the market psychology you can make a very good assessment of how the market will react. It's only going to do one of three things, after all - rise, fall, or stay level. If you can eliminate at least one of those choices you have very good grounds for prediction.

That's all very micro and short-term, though.

One isn't going to be able to predict the reaction of the market to a news event 6 months in advance, but when talking in that time scale, news events are reduced to mere blips along the path of prices.

 

[Profitaker]

Andy

Well, if it works for you then who am I to knock it !

I would point out however, that just about any methodology has worked at some point in the past, and no methodology works all the time, and it's very easy (and expensive) to be folled by randomness.