Don't Be Fooled By Randomness

Raleigh Lee

Trader
Oct 8, 2012
11
0
17
81
www.traderstao.com
:confused: Some studies have shown that a high percentage of chart patterns may be simply random lines on a piece of paper. Burton Malkiel in A Random Walk Down Wall Street described an experiment his students participated in, using a hypothetical stock. Each day they flipped a coin, plotting heads as a 1/2-point gain and tails as a 1/2-point decline. The resulting chart from these random coin flips displayed all the classical patterns such as head and shoulder formations, flags, pennants, triangles, etc. There were even indications of cycles.
 

eyeball

Master Trader
Sep 25, 2011
164
12
49
Randomness

Rather late in the game for me to respond to your posting , however , nevertheless I have some thoughts on randomness that speak to the issue and the example in your posting.I'll preface my argument by stating that I categorically do not believe that randomness exists in financial markets but rather that all pricing of forex, stocks, bonds ,commodities, derivatives,ect., ect. are causative in nature.
You cite the well known example of coin flipping that creates charts that bear a remarkable resemblance to legitimately created financial charts. While this is true, it does not mitigate the legitimacy of financial charts it does,however, underscore the fact that charts of any kind, however created, share significant similarities. By this you further infer ,although unstated , that since randomly created charts bear this resemblance we must conclude that financial charts must also be randomly created and are therefore of little or no use in determining future prices. The logic is specious in that the randomness that you ascribe to pricing does not exist in the first place and therefore all conclusions that follow from that false premise are equally flawed. In my view "randomness" is largely misunderstood. Let me cite the following single and simple example. although there are an infinite number more that I could refer to. Take the case of a croupier in a casino operating a roulette wheel. Certainly in the minds of most , if not all, the outcomes red , black or a particular number are essentially random.But are they really? If we were somehow able to measure exactly the amount of thrust he used to turn the wheel, the arc that was used to pitch the white ball, the starting point of the wheel itself , and an infinite number of other variables that went into that particular roulette spin we would be able to determine where the ball would eventually end up. Although the variables are infinite the mind of man is finite and we are incapable, even with the aid of the fastest computers, to do it. We therefore assign it to "randomness", but its really a product of that infinite number of variables that we cannot measure fast enough. Similarly with financial instruments, if we measure the salient variables fast enough we can determine where the price is going to wind up, and that ,sir , is doable. I do it every day
 
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