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: With regard to reversion to the mean, I'd suggest a hour or two with *Time
: Diversification Revisited* Reichenstein and Dorsett, Baylor University and
: Research Foundation of the Institute of Chartered Financial Analysts,
1995.
What? Read a book written by academics for the Society of Random Walkers? On
a list devoted to technical analysis, that's heresy!! :-)
What I meant by the following:
> If you believe that everything reverts to the mean, then you're using the
> wrong math to trade. If you believe that the markets conform to a
> binomial/Gaussian distribution, you need a reality check.
is that a lot of 'orthodox' market theories (random walk, modern portfolio
theory, etc.) are based on the assumption that the markets conforms to the
normal distribution. But that is based on the assumption that the data is
continuous. The fact that we have gap openings should clearly show that the
markets are not continuous and they do not conform to the normal
distribution but rather to the Paretian distribution (fatter tail ends.).
What may seems to be an event reverting to the mean is actually 'normal'
market actions. :-)
: With regard to normal distribution, its the break outside the distribution
: that produces the greatest opportunities for the trader. In the past ten
: years we have had four or five events that come to mind wherein markets
: moved out four standard deviations or more (on a monthly basis) from the
: mean and all four occurrences provided tremendous opportunity as they
: reverted. Once in lumber, once or twice in coffee, once in wheat and once
: in the nasdaq (closer to 6 SDs). So, if there have been only four or five
: such occurrences in the past ten years, why do I need any sort of reality
: check?
What may seem to be 6 sigma events with in a Gaussian distribution in
reality is a insignificant 2 sigma event with a Paretian distribution. And
for a guy like me whose longest trade might last 12 hours over a 2-3 day
period......these events are irrelevant.:-)
: > : The system trader's primary job is finding the
: > : next system. The system trader's greatest fear is that his system is
in
: > the process of disintegration.
: >
: > Again, prove it. If you're gonna keep on making these generalizations,
I'm
: > gonna keep on asking for proof. :-)
:
: One of last year's most effective system trader was likely Roy
Niederhoffer.
: He's made a business of following eleven or twelve systems and picking
which
: are likely to be working at any given moment. I think Mr. Niederhoffer
: would concur that he and his firm's ability to pick the right systems at
the
: right time has contributed to their success.
But that doesn't prove your statement that 'The system trader's primary job
is finding the next system. The system trader's greatest fear is that his
system is in
the process of disintegration.' I'm a systematic trader and I'm not looking
for the next system. And my greatest fear is not my system's disintegration.
My greatest fear is missing a signal because I was in the head sitting on
the throne. :-)
: I agree with you that the system that fails is fundamentally flawed but I
am
: of the opinion that declaring a system fundamentally sound is as difficult
: as proving that global warming is something other than an aberration. The
: majority of the systems in use today have not been around long enough to
: impress beyond simple randomness.
But if you've test it right (backwards, forward, rolling forward,
etc.)......
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