Random Walk Hypothesis- Right or Wrong?

[mrsoul]

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?

 

[rathcoole_exile]

why do you keep asking the same question on multiple threads ?

 

[N Rothschild]

short term moves arnt random at all, the entire market moves in beautiful cycles. once you know them its almost like perfect symmetry

 

[arabianights]

The vast majority of the time the markets are indeed random in the sense that they are just going where the orders are, rather than moving on any particular fundamentals. That does not mean that they are following classical brownian motion, which is the idea of the random walk hypothethis.

 

[MrGecko]

Movements in markets aren't random, it is just that they can be modelled as such.

 

[shadowninja]

Complex but not random.

 

[NetTecture]

Depends on scale.

Skalping level may be random - an individual larger order hitting the market and moving the price is totally random.

At larger levels, you get into chaotic behavior, then into not random.

 

[new_trader]

Complex but not random.

Very good! Agree 100% ..A combination of strong hands, weak hands and the foolish public!

 

[rathcoole_exile]

and mystical freaks who insist on writing in weird colours 'cos they think it's cool, mysterious, enigmatic blah blah blah

 

[Charlton]

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?

They are most definitely not random. They have purpose and direction.

Charlton

 

[new_trader]

They are most definitely not random. They have purpose and direction.

Charlton

Exactly. But the guessers, gamblers and hit-and-miss traders will never understand this. They believe the answer lies in a magic formula and/or pretty coloured lines. Obviously stuff that they read in a glossy trading book, probably one with pictures of money on the cover!

 

[George Soreass]

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?

How can a market movement be random when it's all influenced by humans? I would understand if the market price was decided by a once a minute roll of the dice, but the fact is if bund futures are 123.16 and I need to buy 5000 at market, it's not going to fall when I buy them! The thing is if you read the moves, spot the charts and you collectively see the same thing as the majority of traders, you will make money - if the market falls to a huge support and there is a wall, visible and invisible of money supporting that price, and you sell it and it bounces ... of course you've lost, so it's not random because that was a collection of braind deciding that was a good place to buy, and the one stupid (or brave, thin line) brain that decided to sell into it lost

 

[mrsoul]

Question:

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.

 

[Rhody Trader]

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.

You're falling here into the common trap of equating Win % with trading success. It's only part of the equation. A 60% win rate system doesn't look nearly as good when you find out that you're risking 2 to make 1, while a 30% win rate system which risks 1 to make 5 looks very good.

 

[mrsoul]

You're falling here into the common trap of equating Win % with trading success. It's only part of the equation. A 60% win rate system doesn't look nearly as good when you find out that you're risking 2 to make 1, while a 30% win rate system which risks 1 to make 5 looks very good.

Thanks - I guess the trick is to find trades with good risk/reward ratios that work at least 50% of the time.

 

[arabianights]

in the extreme, some trades only have to work once in your lifetime for you to win

 

[Charlton]

Thanks - I guess the trick is to find trades with good risk/reward ratios that work at least 50% of the time.

They don't have to work at least 50% of the time. If you have good money management strategies in place that allow profits to run and cut losses quickly you can still make a profit with a less than 50% win rate.

Control and worry about the things that you can control:

- good analysis leading to high probability setups
- good risk/reward ratios
- good money management techniques to protect your capital.

This is what an edge is - not certainty - but increased probability.

Charlton

 

[Rhody Trader]

Thanks - I guess the trick is to find trades with good risk/reward ratios that work at least 50% of the time.

You missed my point. You don't need a 50% win rate if your winners are sufficiently large relative to the losers. The ideal world is a high win rate and a high winner/loser ratio, but good luck finding one.

 

[RedGreenBen]

Greetings Fellow Traders,

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

If short-term movements were truly random them medium and long-term movements would be random too.

I'm pretty sure that the Dow didn't go from 14,000 to 6,500 because of statistical noise.

Ben

PS This is actually a bit more complicated than I make out, depending on what you really mean by 'random', but the general point is still valid-ish.

 

[montmorencyt2w]

in the extreme, some trades only have to work once in your lifetime for you to win

Or to fail and wipe you out