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Old 09-18-2013, 11:07 AM   #1

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Random Trading & Natural Selection

Attached is a PDF containing my thoughts about random trading, largely inspired by Mystic's thread and podcast interview.

It would be great to hear people's responses, especially if you can spot flaws in my argument.

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File Type: pdf Random Trading and Natural Selection.pdf (19.4 KB, 613 views)
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Old 09-18-2013, 01:47 PM   #2

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Re: Random Trading & Natural Selection

"Although the amount made or lost on any given day will differ
depending on how far from its open the session closes, over time (or
large sample size) this should become insignificant, as small losses will
negate small gains and large losses will negate large gains."


I'm not sure about this statement. If the game is rigged to your disadvantage then this may not happen. IMO it depends on the distribution function. If it skewed positively then you have a chance of making money with random trading. This article that was posted before is about the positive skew of SPY and the high chance of profitable random trading in that market. The problem is that distributions are known after the fact.
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Old 09-18-2013, 03:37 PM   #3

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Re: Random Trading & Natural Selection

Quote:
Originally Posted by equtrader »
"Although the amount made or lost on any given day will differ
depending on how far from its open the session closes, over time (or
large sample size) this should become insignificant, as small losses will
negate small gains and large losses will negate large gains."


I'm not sure about this statement. If the game is rigged to your disadvantage then this may not happen. IMO it depends on the distribution function. If it skewed positively then you have a chance of making money with random trading. This article that was posted before is about the positive skew of SPY and the high chance of profitable random trading in that market. The problem is that distributions are known after the fact.
Hi,

Thanks for reading. I'm not sure about my statement either - in fact I'm not sure about the whole argument.

One simple problem with what I say there is that days with outlying ranges tend to be down days (crash scenarios) in certain markets. Another problem is that there are very good fundamental reasons for expecting certain markets such as SPY to exhibit a long term uptrend (caused by smaller but more frequent up days).

One possible solution to this is to "tune" the degree to which randomness dictates trading decisions (i.e. skew the distribution of outcomes or "weight the coin").

Another is get closer to the noise by applying the concept using smaller timeframes.

Both of the above obviously entail new problems all of their own.

As soon as you apply the concept I describe in the PDF though, does any of the above matter? Some instances of the strategy will benefit from the skew, whereas others won't; the former enjoy increased position size to generate a net profit.

Hope I've understood you correctly.

BlueHorseshoe
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Old 10-26-2013, 11:30 AM   #4

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Re: Random Trading & Natural Selection

I personally do believe markets are not moving randomly otherwise consistant profits could not be made......even if only a pattern is becoming repetitive and the rest is random, still means the "randomness" label can't be applied there.

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Old 10-28-2013, 07:45 PM   #5

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Re: Random Trading & Natural Selection

Quote:
Originally Posted by tradingwizzard »
I personally do believe markets are not moving randomly otherwise consistant profits could not be made......even if only a pattern is becoming repetitive and the rest is random, still means the "randomness" label can't be applied there.

TW
Hi TW,

I agree with you - I don't think markets are random either, not all the time, but . . . if they were I think they would be far easier to trade, not more difficult. It is natural to associate "random" with "unpredictable", but this is a mistake.

Random price movements conform to predictable distribution models.

Consider the following game:

I will toss an evenly weighted coin multiple times. If there are five heads in a row, Player A receives 200. If there are not five heads in a row, Player B will receive 20.

Who would you sooner be, Player A or B?

I look forward to your response . . .

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Old 10-28-2013, 08:18 PM   #6

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Re: Random Trading & Natural Selection

Player B for me

OMG my message is too short so I had to write this
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Old 10-29-2013, 12:09 AM   #7

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Re: Random Trading & Natural Selection

Quote:
Originally Posted by BlueHorseshoe »
Hi TW,

I agree with you - I don't think markets are random either, not all the time, but . . . if they were I think they would be far easier to trade, not more difficult. It is natural to associate "random" with "unpredictable", but this is a mistake.

Random price movements conform to predictable distribution models.

Consider the following game:

I will toss an evenly weighted coin multiple times. If there are five heads in a row, Player A receives 200. If there are not five heads in a row, Player B will receive 20.

Who would you sooner be, Player A or B?

I look forward to your response . . .


BlueHorseshoe
Depends which player is Goldman Sachs.
There are no evenly weighted coins in the market.
Apart from greed,corruption and fraud "logical" thinking is what caused the huge losses in the first place.

Do they?
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Old 10-29-2013, 12:19 AM   #8

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Re: Random Trading & Natural Selection

This is not random................... .............
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