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I might also add that past risks are only an effective indication of
future risks for markets that do not have possible rare events.
Which markets? Markets that are naturally highly volatile and scary
are the least likely to exhibit these deceptions. High Volatility
instruments have shown their true colors; I would feel more
comfortable with their risks (because I know them) than with those
that appear to have none (low volatility) which was in a trading
range suitable for day-trading and suddenly might break out into a
crazy run...
rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "palsanand" <palsanand@xxxx> wrote:
> 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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