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I will give my best shot at this. The moral may be that there are
situations where randomness maybe mistaken (fooled by) for non-
randomness and vice-versa. More generally, we underestimate the
share of randomness in about anything, except when it is the
specialist who is the fool of all fools. Distrubingly, science has
only recently been able to handle randomness (Probability theory is a
recent arrival in mathematics). We should also be concerned with
situations where patterns and messages may have been ignored, but
mistaking randomness for non-randomness is not as costly as an error
in the opposite direction. Even popular opinion warns that bad
information is worse than no information at all..
rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "Gary A. Serkhoshian"
<serkhoshian777@xxxx> wrote:
> Wavemechanic and Mark,
>
> Thanks for the post re Brownian motion, but what I can't figure out
is what is the practical take away from all this?
>
> Thanks,
> Gary
>
>
> wavemechanic <wd78@xxxx> wrote:
>
> ----- Original Message ----- From: "quanttrader714"
<quanttrader714@xxxx>
> To: <amibroker@xxxxxxxxxxxxxxx>
> Sent: Monday, November 17, 2003 9:39 AM
> Subject: [amibroker] "Random prices" (was Re: Backtest using equity
curve)
>
>
>
> This proves nothing. Your model is flawed. Generate a chart with
one
> dimensional Brownian motion and there's not a person on this board
who
> would be able to tell it from a "real" price chart.
>
> Right. Here is a nice website that demonstrates:
http://www.ms.uky.edu/~mai/java/stat/brmo.html
>
> An omniscient
> being could create perfect deterministic models of the markets but
for
> mere mortals, there's significant randomness caused by an incredibly
> complex mix of competing forces that "nudge" prices in different
> directions, from institutional purchases to Johnny Jones cashing in
to
> pay for his daughter's wedding to daytraders, etc., etc., etc.
> Certain forces will prevail and/or be in synch to varying degrees
over
> time. But even in a totally random process, anything that can
happen,
> will happen if you wait long enough.
>
>
> --- In amibroker@xxxxxxxxxxxxxxx, uenal.mutlu@xxxx wrote:
> > // generate random series in the range 0 to 100 and plot it
> > Graph = Random() * 100;
> > Plot(Graph, "Random graph", colorBlue);
> >
> > Does any real chart look like such a random chart: NO.
> > This proves the basic fact that nothing in the markets
> > is or was ever random.
> > UM
> >
> >
> >
> > ----- Original Message -----
> > From: "palsanand" <palsanand@xxxx>
> > To: <amibroker@xxxxxxxxxxxxxxx>
> > Sent: Monday, November 17, 2003 1:19 AM
> > Subject: [amibroker] Re: Backtest using equity curve
> >
> >
> > 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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