Random Walk Hypothesis- Right or Wrong?

[tomorton]

I believe market movements are rational as they respond to rational decisions by thousands of participants, as has been pointed out. This doesn't really answer the question whether moves up or down are random as, on the finest resoluition, say the next 2 seconds of trading, we can say the market is random if nobody can reliably say whether the move in that time is up, down or sideways.

But this is all just hot air if it doesn't lead to profit and/or avoidance of loss. The question of whether RWH is true or not would be interesting if the conclusion one way or the other led automatically to a means of making money or a decision to find another enterprise - which it can't, its just an amusing diversion.

 

[George Soreass]

I understand what you are saying George.

Here is my question:

If you buy off of a "visible or unvisible wall of support" 100,000 times, will that trade win more than 60% of the time?

If so then the holy grail ( any trade that works more than 60% of the time- year in year out), is pretty easy to find.

Guy below mine made a good point, which I also make. Let's say a share in XYZ ranges either side of 380 and 420 between 2000 and 2004, then it broke 420 and went up to 700 by 2007 right, ..... then when the mkt comes off it falls back, NOW YOU KNOW 420 could be a great place to buy, so you buy it, and the invisible wall props it up, you might get out at 480 on the first hit, then it re-tests, you buy again, out 450 this time, then you buy again and it bounces - the more times it retests at some point you have to think MAYBE this market wants to break, so the next time you leave it, and it falls through - you think OK well I reckon 380 will hold, and it does etc ... so you make money on those HIGH %age trades, and then the one time you buy at or around 380 and it doesn't work, you have a tight stop. It really doesn't matter what % of winners and losers you have, if you look for 100 ticks on a winner, and have a 10 tick stop on your losers, in a bad run you can have 900 losing trades out of 1000 and still be even. Making money in the markets is not about being perfect, it's not about being right all the time .... it's the discipline in cutting out losers and home running the winners :clap:

 

[Rhody Trader]

I believe market movements are rational as they respond to rational decisions by thousands of participants, as has been pointed out.

You honestly believe that all trading/investing decisions are made rationally? If so, you and I are definitely seeing very different things in the markets.

 

[George Soreass]

You honestly believe that all trading/investing decisions are made rationally? If so, you and I are definitely seeing very different things in the markets.

I don't .... you get some stupid, absurd moves. Who on earth DIDN'T think internet stocks were about 100 times over valued in the dot com boom? If they didn't then they have no ability in valuing anything. It's like 1pence coins suddenly being hyped up and sold as collectable - suddenly people would be paying £1 for a 1p coin - it wouldn't make sense. That was what it was like, certainly not rational as a move. But there were decent trades with a good edge to be had during the up and during the down of such irrational overall moves.....

One crazily illogical and irrational move caught me out and wiped out my personal spread betting account last year .... Volkswagen. Suddenly within days they had doubled doubled doubled and doubled again - everything has a price, and a huge car maker going into a very sever recession suddenly was stupidly over priced .... certainly not rational, but my losses stemmed from selling every time it doubled and not having a stop

of course after I got out at 985 euros, it very quickly retrated back to 200ish

 

[MrGecko]

Volkswagen. Suddenly within days they had doubled doubled doubled and doubled again

I remember it well; it was basically a MASSIVE short squeeze when Porshce announced they owned calls on something crazy like 75% of the stock - quite rational in that sense.

I don;t think it's appropriate to consider whether moves in the market - at whatever level - are rational or not, because an action can only be rational if it allies itself with an intention to achieve something; suppose Porche also had a One touch barrier with a strike of 1,000 - in that case, secretly accumulating rights on one of the most heavily shorted stocks in the german market, then announcing it to the market, seems perfectly rational (we will skirt around the legality / morality of it, but you get the point). You cannot say whether an action is rational or not unless you know the intention - and of course you cannot know the intentions of each and every market participant.

It is the intention factor that I think is important - and I coin the term from another poster in the "Basic Probability" thread. While granular movements in the markets may well be suited to models of random variables, behind each and every transaction there is an intention - ergo it cannot be random.

 

[Rhody Trader]

I don;t think it's appropriate to consider whether moves in the market - at whatever level - are rational or not, because an action can only be rational if it allies itself with an intention to achieve something.

Rationality is of importance to the original subject of this thread because efficient markets and random walk and all that are founded upon rational decision-making by market participants. I agree that intention is the driver of action, but intention is under-pinned or under-mined by whether one is thinking rationally or not.

 

[tomorton]

Agreed the tech bubble was a bubble, but being long tech stocks in mid to late 1999 was the most rational thing to do at the time. It would have been irrational to not see it as a bubble though. Its always rational to buy a commodity that is appreciating in price.

 

[Rhody Trader]

Its always rational to buy a commodity that is appreciating in price.

But when do you say that it's going up? And at what point do you say it's no longer going up in price? There were a lot of folks buying what they thought was a rising market in 2000 when in fact the market had turned.

Would you say buying something because you don't want to miss out a rational reason for buying? That's a big part of what drives bubbles.

 

[tomorton]

John - A rising price is indicated by the usual signs that define an uptrend and we're all familiar with these. The most likely thing that an uptrend will do tomorrow is continue upwards, but eventually it will fail and that's why we put in stops and apply a risk:reward test to new positions and use money management.

The fact that it was a bubble founded on irrational fundamentals didn't make it irrational to make a profit by trading through buying low and selling high in just the usual way. Because I'm a short-term trader, I often have no knowledge - nor interest in finding out - the fundamentals driving a price. Through the tech bubble I (successfully) traded on price, never on the speculative fundamentals of this or that new bit of tech kit or software.

But your observations also carry a possible moral implication, that, because a bubble is a transient and dangerous condition for the unwary, perhaps the more wary participants in the bubble are to held responsible for the losses of others when it bursts. I don't accept that for one minute: this is capitalism, and let the buyer beware. You are a respected educator - surely you agree that people who do not understand the risks in buying something should not be buyers?

 

[rathcoole_exile]

'ere that be a nice post there Tarm.

 

[George Soreass]

I don;t think it's appropriate to consider whether moves in the market - at whatever level - are rational or not, because an action can only be rational if it allies itself with an intention to achieve something; suppose Porche also had a One touch barrier with a strike of 1,000 - in that case, secretly accumulating rights on one of the most heavily shorted stocks in the german market, then announcing it to the market, seems perfectly rational (we will skirt around the legality / morality of it, but you get the point). You cannot say whether an action is rational or not unless you know the intention - and of course you cannot know the intentions of each and every market participant.
QUOTE]


You are absolutely right on this one. Sure it was maybe immoral, but I do doth my hat to the boys at Porsche for that move, they did incredibly well ..... that was good old fashioned cornering of a market, and I along with countless hedge funds were well and truely cornered, like scared animals - I did a few grand, but a small price to pay to be in such a (and I know this is an over-used term) black swan event

 

[Rhody Trader]

The fact that it was a bubble founded on irrational fundamentals didn't make it irrational to make a profit by trading through buying low and selling high in just the usual way.

No, it doesn't make your trading decisions irrational. But you are just one actor and the price movement is being carried partly by rational folks taking advantage and irrational folks who don't want to miss the ride (or whatever emotionally driven decision). If the irrational folks weren't there you wouldn't have the disequlibrium situation from which to profit by either riding the emotional tide or going counter too it when it's run too far.

But your observations also carry a possible moral implication, that, because a bubble is a transient and dangerous condition for the unwary, perhaps the more wary participants in the bubble are to held responsible for the losses of others when it bursts. I don't accept that for one minute: this is capitalism, and let the buyer beware. You are a respected educator - surely you agree that people who do not understand the risks in buying something should not be buyers?

A respected educator? Me? Who'd have thunk it! :cheesy:

As for the morality, I can remember a great many "in the know" folks screaming from the rooftops "Beware the bubble!". They can't force folks to listen, even assuming that said pundits are actually correct.

 

[George Soreass]

Beware the pundit more like ....

have you seen how many pundits were wheeled on to CNBC all proclaiming the end of the bear market is here!!! And that was BEFORE the dow even sunk below 10'000

pundits are really worthless .... I thought last year was for me personally, and for a great many, was the easiest year since 2000 to call, but even Buffet was absolutely sh1te

 

[Rhody Trader]

pundits are really worthless .... I thought last year was for me personally, and for a great many, was the easiest year since 2000 to call, but even Buffet was absolutely sh1te

Buffett isn't a market timer. Let's see where those investments of his stand in 5 or 10 years before we say he was good or bad.

I'll agree, though. Last year was a pretty easy directional call. This year was never going to be that easy.

 

[montmorencyt2w]

Beware the pundit more like ....

have you seen how many pundits were wheeled on to CNBC all proclaiming the end of the bear market is here!!! And that was BEFORE the dow even sunk below 10'000

pundits are really worthless .... [...]

They are part of the entertainment industry, and poor quality entertainment at that.

 

[mrsoul]

They are part of the entertainment industry, and poor quality entertainment at that.

I like your quote mont.
Taking fewer better trades is where its at.

"Lose your opinion not your money".

 

[montmorencyt2w]

I like your quote mont.
Taking fewer better trades is where its at.

"Lose your opinion not your money".

Thanks Mr Soul. Inspired originally, I think, by Barry Burns, and on T2W, primarily by Trader_Dante, and those who trade like him.

 

[tomorton]

I love irrational players in the market - they make the game easier for the rest of us. Its all part of human nature and crowd behaviour - if you understand people you can understand the market, whether its in commodities, shares, gold, art or fine wine, its people that make the market behave the way it does and I love them.

 

[mirq]

Greetings Fellow Traders,

The Random Walk Hypothesis states that, over time, all short term movements in the markets are random.

Has anyone found something that is profitable more than 60% of the time, year in year out?

I am not interested in what you have found; I just want to know if it's possible.

What are your thoughts and experiences?

Yes, I have found a method based on statistics that is profitable I think more than 90 %. If you are interested I'll be glad to show you proves.
I don't understand why statistics is so underestimated on the majority of forums. I believe that beating the market, you have to fight against it with its own weapons: the randomness.

Just a glance in my method.