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I agree. I might add that markets are subjected to rare events.
Quiet markets favor rare event traders. Other traders cannot keep up
and are rapidly eliminated from the system when the rare event
occurs. If we are rational and had a good memory, these rare event
traders would have a tough time, because peoples memory of these
events fades in an exponential manner.
I might also add that there are two kinds of trading theories. Some
funds are built around the idea that people overreact to news, while
others have been devoted to the notion that, to the contrary, people
underreact. These beliefs give rise to two categories of trading
styles. On one side we find the contrarians who subscribe to the
following rationale: Since, people systematically overreact, let us
take the other side, sell the winners and buy the losers. On the
other side stand the market (trend) chasers, i.e., momentum players
who do the exact opposite: Since market do not adjust fast enough,
let us buy the winners and sell the losers. Because of randomness,
both categories will show periodic victories, which cannot prove
directly that either theory is right or wrong. A robust system is
one which may combine both of these trading styles into one, thus
able to handle any market condition, size or nature or trading
duration (intra-day, short, intermediate or long-term).
Bad traders have a short and medium term survival advantage over good
traders. Traders with a bullish bias (long only trades) for
instance, do well during rallies and short-sellers during bearish
bias. The sucession of sunny and panicky market regimes causes
traders whose trading style is in agreement with that particular
cycle to surpass others in the short-term and proliferate at the
expense of better traders (who use generic styles) and who ultimately
prevail in the long run...
rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "Harkey Edwards" <he3@xxxx> wrote:
> Howard,
>
> I have been reading with interest the "Random Prices" posts and I
thought I
> would way in.
>
> 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.
>
> After giving it considerable thought over the years my conclusion
is as
> follows. Markets are not random. 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. 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. 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.
>
> 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. Many systems
attempt to
> exploit over reaction by the market to these random events. For
example
> Over Bought Over Sold indicators, Bollinger Bands, etc. When
overreactions
> does not occur the prices go sideways or are tight around the
regression
> line and can be the source of Whip Saws.
>
>
> To conclude, there is order and randomness occuring at the same
time. I am
> suggesting that the short-term trader is attempting to identify
these two
> forces and make money by exploiting the difference.
>
> Harkey
>
>
>
> -----Original Message-----
> From: Howard Bandy [mailto:howardbandy@x...]
> Sent: Tuesday, November 18, 2003 9:17 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: RE: [amibroker] "Random prices" (was Re: Backtest using
equity
> curve)
>
> Assume that we (or someone else who is brighter than we are) can
model
> 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@xxxx [mailto:uenal.mutlu@x...]
> > 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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