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In his book "The Profit Magic of Stock Transaction Timing", J.M.
Hurst proves that market movement is not random, and by analyzing a
large "stable" of underlying instruments one could find excellent
opportunities for profit each and every day. The movement is not
random but non-stationary because markets do not move without a
purpose or a goal, they move because of an imbalance between supply
(sellers) and demand (buyers) with the price tending to equalize it.
However the outcomes are random, i.e, unknown and the probability of
winning is undetermined, i.e., not a constant.
Identifying persistent price patterns helps one to determine the
dependance of the outcomes. The existence of a pullback or a rally
situation is dependant on the existance of a previous uptrend or a
downtrend and so is the existance of a trend reversal. What's real
price movement in response to a clear signal and what's just random
noise? Figuring out the difference is vital and according to John F.
Ehlers in a recent article in S & C Magazine such a distinction can
be important to trading. If one could avoid periods when the market
has no clear trend (just enjoy being flat), one could avoid whipsaws
and get cleaner trades. If one could identify periods that were
filled with noise and no clear signals in either direction, one could
also switch trading tactics to suit the situation, for e.g., day-
trading instead of position-trading. At the very least, one would
know what situation one faces.
rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "quanttrader714"
<quanttrader714@xxxx> wrote:
> You guys are confusing randomness, independence and stationarity
big time.
>
> --- In amibroker@xxxxxxxxxxxxxxx, "Dave Merrill" <dmerrill@xxxx>
wrote:
> > agreed. if the fact that a trading system did well in the past
has no
> > bearing whatsoever on whether it does well in the future, how can
we
> know
> > anything at all about the future performance of a proposed trading
> system?
> >
> > dave
> >
> > The gambler”Ēs fallacy is a fallacy because the gambler ignores
the
> > independence of the outcomes and looks for patterns that do not
> exist. If
> > we have designed trading systems based on recognition of patterns
that
> > precede profitable trading opportunities, and if those patterns
are
> > persistent, then we no longer have random, independent outcomes.
Our
> > trading systems do have serial dependencies and upward sloping
equity
> > curves. So analysis of the equity curve provides an indication
of the
> > health of the trading system.
> >
> >
> >
> > Howard
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