|
PureBytes Links
Trading Reference Links
|
i can't resist putting my 2 cents in on random walk.
note: this is postulation put forth on my part, to put it simpler, an
opinion, we all have one right?
speaking strictly technical here the stock market is random for
all who have not come up with predictive patterns on price charts
that they can increase the amount of money in their trading account with.
we know most traders do not grow their accounts over time,
therefore let me say that the stock market is random for all in that category.
including some who have gotten lucky and increased their
account size anyway. that would put me in this category.
in interest of helping all in that category i want to approach this
argument from the point of view that the stock market is moving
forward in time in a random walk manner.
personally i believe the greatest way to prove something is valid is
to try and prove that it is not valid. unfortunately in all of my attempts to
prove the markek is not random. i always end-up back at square one, the
freaking thing
is random, darn't. if the stock markets march forward in time is random then
most likely there will not be price patterns that can be used for a
predictive purpose. in order to prove the market is not random i must find
price patterns that are predictive.
only proof in the pudding is i will make money.
i must assume none will work until proven otherwise, hence, the
market is random walk moving forward in time until i can prove
a pattern is predictive ie: the bottom line on my trading statement
will randomly get larger. i want nothing more than a non-random
stock market because i want my statement to grow.
first off if we are talking about price charts representing the stock
market let's say the s&p 500 we would be talking about "random
walk--1-dimensional"
http://mathworld.wolfram.com/RandomWalk1-Dimensional.html
because we are always moving forward in time.
here are some examples of random walk--1-dimensional charts:
(if the graphs do not appear they are at the link above)
if we were not moving forward in time we would be talking about
random walk--2-dimensional:
http://mathworld.wolfram.com/RandomWalk2-Dimensional.html
some examples of a random walk--2-dimensional charts:
how would you like to try and predict price movement of the 2-dimensional
sort(humor). let's not even fathom 3-dimensional random walk!
in a random walk--1-dimensional chart moving forward in time plotted on a
piece
of graph paper at times there will be patterns that seem to affect the random
walk forward, for example a trend line, an 18 day moving average or any moving
average for that matter. or any point or line you can come up with on that
chart.
at first glance some of these patterns appear to have the potential for
predictive capabilities. but upon closer examination it is rare that over
time you can select
any of these patterns and make consistent predictions with them.
in most cases i know of there is no predictive method of knowing how far into
the future a pattern will hold or cause price reactions. let's use an 18 day
moving average
of closes. at first glance on a price chart the 18 day moving average looks
very
predictive. upon closer examination trading the 18 day moving average will not
net profits in a trading account.
if you always enter exactly at the 18 day moving average meaning the market
must tick 1 tick past it. once you set this as your rule you will observe upon
closer inspection how many times that price doesn't quite reach 1 tick past
the 18 dma. if you adjust for this by placing your order 5 ticks away from the
18 dma you will increase the size of each of your losers by 5 ticks.
the larger losses on all trades will offset the increased winners you
pick up fading the 18dma. no matter what entry adjustment you make it will
not add dollars to your trading account. when you consider you must
execute entry, where you are wrong, and profit objective consistently.
in order to move forward with the exercise let's say you take the exact 18
dma as your consistent entry.
you are then confronted with how far do you let price
march through that 18 dma before you say you are wrong and take a loss.
this must be executed in a consistent manner on every trade.
here is what you are confronted with. the farther you let price move against
you, the less frequent your losses will be but this is offset by the fact that
you increase the size of your losses when you do take them.
the more restricitive you are in how far you let price move against you the
smaller the size of your losses but this is offset by the increased frequency
of losses.
in the situations where price does not move far enough past the 18 dma
to create a loss, you are now confronted with where do you take profits.
you must consistently take profits far enough away from the 18 dma
to offset your losses. the farther away you make your target the larger the
winner but the more frequently you will give it all back. the closer you make
your target the more frequent your winners will be but they must be frequent
enough to offset your losses.
all in all the 18 dma standing by itself no matter what adjustments you make
over time will not and can not generate profits in a trading account. nor can
any
other moving average or trend line. i know some people try to bring different
tools in to qualify taking the 18 dmalike a smaller moving average) as a
trade but
to date i have seen not one other trading tool or device that will create a
winning trading plan using the 18 dma or any other ma or trendline.
i am searching all the time. i have spent 15 years about 8 of which on a full
time
basis researching price patterns.
i would love nothing more than to be proven wrong!
therefore until i discover or someone points out to me a price pattern that
will
generate profits i have to conclude the markets are random even though
they may seem to follow patterns at times. until then all trading is gambling.
i like this kind of gambling so i will continue to do it. i would much rather
prove the stock market is not random buy my postulation above.
thanks for reading if you made it this far.
please feel free to bash me, trash me, or send cash to me for saving you 15
years of work. no seriously, please feel free to contact me via the list or
privately
to continue the quest for the holy grail. if you have it and you are keeping
it to yourself, may you do pure and wonderful things with it.
cheers,
kevin
|