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<span
>Howard,<span
class=EmailStyle18>
<span
> <span
class=EmailStyle18>
<span
>I have
been reading with interest the “Random Prices” posts and I thought I would way
in.<font size=2 color=navy
face=Arial>
<span
> <span
class=EmailStyle18>
<span
>As we all
know, this is a fundamental issue regarding trading. Academics believe the market is random and therefore over
time a trader will not be able to make money. I have read many authors who make this case and of course
they do so convincingly.
<span
>
<span
>After
giving it considerable thought over the years my conclusion is as follows.<span
> Markets are not random.<span
> The stock market is a process whereby
buyers and sellers are in search of the true value of a stock (as in any other
market). The true value of a stock
ultimately prevails. In retrospect
it is easy to recognize. A
regression line, for instance, can be drawn through a set of price data and one
could argue that this line represents the actual value of the stock.<span
> The stock prices oscillating around the
regression representing perceived value being pulled by actual value like
gravity pulls a planet. Looking
forward the slope of the line is unknown and it is this unknown that causes volatility
in the current price. It is here
that randomness is introduced into the system. Real value is affected by real events that are not
predictable, but are random. For
example the Exxon Valdez (SP?). This
certainly affected the slope of the regression line and was not predicted.<span
> Predictably, it caused volatility in
the perceived value of the stock at the time in excess of the change of actual
value. I realize that this is not
a dramatic example. Another
example is the .com bubble. This
is an example of perceived value getting way out of line with actual
value. Constant with what I have
said real value overruled in the end.
<span
>
<span
>Most of us
on this board are focused upon the twilight zone or the leading edge of the
process. As I have said there is randomness
at this point. This randomness is quantified
by price volatility. If volatility
is low randomness is low, or perceived randomness is low.<span
> Many systems attempt to exploit over reaction
by the market to these random events.
For example Over Bought Over Sold indicators, Bollinger Bands, etc.<span
> When overreactions does not occur the
prices go sideways or are tight around the regression line and can be the
source of Whip Saws.
<span
>To
conclude, there is order and randomness occuring at the same time.<span
> I am suggesting that the short-term
trader is attempting to identify these two forces and make money by exploiting
the difference.
<span
>
<span
>Harkey
<span
>
<span
>
<span
>
-----Original Message-----
From: Howard Bandy
[mailto:howardbandy@xxxxxxxxx]
Sent: Tuesday, November 18, 2003
9:17 AM
To: amibroker@xxxxxxxxxxxxxxx
Subject: RE: [amibroker]
"Random prices" (was Re: Backtest using equity curve)
<span
>Assume that we
(or someone else who is brighter than we are) can model<font
size=2 color=black face="Courier New">
market movements using an equation consisting of several terms -- say long
term trend, plus long time cycle, plus short time cycle, plus supply and
demand, plus news, plus market maker manipulation, plus sunspot activity,
plus anything else that can be imagined. Anything that cannot be
attributed
to a specific term, or any error in our modeling process, is lumped
together
as residual. The modeler will repeatedly analyze the residual looking
for
non-random characteristics and remove them by adding additional terms to
the
equation. Whatever is left (whatever cannot be understood or modeled)
is
random noise. At least until a better model with a smaller random
component
is developed.
Howard
> -----Original Message-----
> From: uenal.mutlu@xxxxxxxxxxx [mailto:uenal.mutlu@xxxxxxxxxxx]
> Sent: Monday, November 17, 2003 9:40 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: Re: [amibroker] "Random prices" (was Re: Backtest
using equity
> curve)
>
> Why should there be a random component in price movement?
> Supply and demand (plus News) drives the price.
>
>
<<<SNIP>>>
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