Random Walk Theory

[theroguetrader]

who " really " believes this...? :|

 

[Rhody Trader]

Quite a few people actually. I'm not in that camp myself, mind you, but they're out there to be sure. It's a heavily academically influenced theory, so you can guess where a lot of its supporters come from.

 

[dbphoenix]

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.

 

[rainman2]

Jan 27 - Random

 

[arabianights]

I think it's a pretty good model most of the time, but there are three major flaws:

1) "Noise" traders do not necessarily cancel each other out
2) Markets are not continuous. Any continuous model is necessarily an approximation
3) Use of the bell curve to model price movement is a misunderstanding of the central limit theorem

I could list others but these are the most important imo

Recommended, related book: Misbehaviour of Markets by Mandelbrot.

 

[jm99]

markets are chaotic imo, behaviour of chaotic system appears to be random, but they are not :smart:

 

[Tadragh1]

Random walk theory definitely might confuse some people, but is good food for thought. Two books I'd recommend:
"A Random Walk Down Wall Street" Malkiel
"A Non-Random Walk Down Wall Street" Lo & MacKinlay

Here is a webpage, the whole website is absolutely TOP-NOTCH, deals with the efficient markets hypothesis. They have many papers for free which are not available elsewhere.

Random Walk Hypothesis

 

[0007]

Random walk - not for me guv!

who " really " believes this...? :|

Random walk theory is a bit like Socialism - sound great in theory but doesn't actually work in practice. Some academics / politicians / civil servants seem to have a knack of being unable to differentiate between real life and theory. Long may it continue, so that those who can are able to profit.

 

[shadowninja]

Jan 27 - Random

Interesting. Like his "I don't care" attitude, too.

 

[BSD]

Random doesn't mean you can't trade profitably.

Yup.

That's what I meant here.

 

[Splitlink]

Split's Random Walk Theory.

For what it's worth.

Once a trend has been established in a large timeframe--daily, for instance-- the smaller timesframes operate on a random basis.

They can be very profitable but they are random, nevertheless, and operate within longer trends.

This is one of the reasons that fairly close stops must be used because, no matter what the TA pundits say, there is no telling how a price is going to act during a morning session, nor any reason why it should not reverse after lunch, when the Dow opens. In fact, it can reverse several times during the day and, still, close in line with the daily trend.

If anyone disagrees then, please, explain the antics of the SBC's during the first hour of trading, when they are trying to establish a price. Spreads and prices are up the wall, most times. That is because no direction has been established by the traders.

Split

 

[BSD]

I'm officially opening a Split's Random Walk Theory Fan Club with me as the first member

 

[arabianights]

BSD, dunno what you're getting at in the other thread - a genuinely random walk (with continuous pricing and time) cannot possibly be traded profitably, nor does it trend.

 

[Splitlink]

A theory is a theory and is only correct until proved otherwise.

From my take of intraday charts, though, there are plenty of aimless wanderings within the framework of a daily or weekly trending market which give no rhyme nor reason for their current direction. Except in hindsight, when all the indicators will be dragged on as comprobation of what was going to happen.

Split

 

[dbphoenix]

If one doesn't have the key, it should come as no surprise that he wouldn't understand the message.

There are those who think charts themselves are noise, because they don't know what all the lines and bars represent.

 

[tomorton]

Anybody who trades or invests, by definition cannot believe this theory for a minute. Anybody who believes this theory is, by definition, not fit to trade or invest for a minute.

 

[dbphoenix]

Anybody who trades or invests, by definition cannot believe this theory for a minute. Anybody who believes this theory is, by definition, not fit to trade or invest for a minute.

But what do you REALLY think?

 

[Splitlink]

If one doesn't have the key, it should come as no surprise that he wouldn't understand the message.

There are those who think charts themselves are noise, because they don't know what all the lines and bars represent.

Similar phrases are being trotted out all the time

"All", being the operative word because some traders have so many lines that they have to be right sometime.

It's like the old song, If the right one don't get ya, the left one will.

I'm not saying that all is random, or that I am right, but no one can prove that I am wrong, either.

The pundits will, always, dig out the old phrases and the new readers will go back to the study table. Whole threads, consisting of hundreds of pages will discuss the puzzle but no one will accept the fact that randomness exists, which will laugh at all the hard work being done.

I write this with tongue-in-cheek but I believe that lots of guys prefer the chat and theories, rather than trading, itself.

Split

 

[Splitlink]

Anybody who trades or invests, by definition cannot believe this theory for a minute. Anybody who believes this theory is, by definition, not fit to trade or invest for a minute.

I do not hold that the Random Theory makes much difference to the patient, long term, investor who has done his homework on the fundamentals. Neither do I disbelieve that patterns repeat themselves. But I do believe that randomness exists in small timeframes, while the market decides which way the main trend is going to go.

 

[dbphoenix]

Similar phrases are being trotted out all the time

"All", being the operative word because some traders have so many lines that they have to be right sometime.

It's like the old song, If the right one don't get ya, the left one will.

Actually, I was referring to grid lines and price bars, so the word "all" can be deleted as it's unnecessary.