How I Trade As If Price Is Random

[How I Trade As If Price Is Random]

 

In the markets you cannot tell this and to simply assume a 50/50 chance of a market moving up or down from any particular point is an error.

 

If a market moves randomly it has an equal chance of moving up by the same percentage as moving down. A market that does not have an even chance of moving up than down is not random.You cannot predict a random market but you can assign probability to it.

 

Definition of random • Statistics governed by or involving equal chances for each item:

[How I Trade As If Price Is Random]

 

 

As for the strategy applied by 1a2b.... yes he needs a lot of dollars if something keeps going against him - he states he does not use leverage for this reason, but the point is still the same.....applying a lot of randomly guessed probabilities for what may or may not occur and for when they might is just guessing at best.

 

If a market is random - you have no way of knowing what percentages can be guessed at and if each tick is truly independent of each previous tick then if something is at $5 now then you cannot know what the percentage chance of it going to $3 is v it going to $50, or the probability of it going up 5% or 4.95% or 400% etc; etc;.....because in your example you are assuming too much.

Who is not the say the fair value of an object really is close to zero and even if it spends 20 years above zero it will ultimately end up going to zero, and what about the random effect of the actual movement itself each day, or time frame?

 

Which is why it is all guess work, and why many spend time trying to perfect other methods of making money assuming entering and exiting are random.....but even this then should be evened out over the long run. If you think the markets are random then you think its all down to luck for who makes money and who does not......no matter your system or how hard you work.

 

 

Of course you can give a probability to a random event. The chance a head will fall is 50%, of two heads in a row 25% of three 12.5%. It is suicide to create a system and not know its implications, probability helps assess the risk.

 

You and I could put up a million dollars each and the person who rolls the highest of six dice wins the lot. One of us will win a random event and one of us will lose. The chance of winning is 50%. That is better odds than you'd ever get at a casino.

[How I Trade As If Price Is Random]

1....if you think markets are random you should not be adopting an active trading approach.

The whole definition of random markets revolves around the idea that you cannot outperform a market if it is random - hence you may as well adopt a passive investment approach.

 

2...its also pointless even trying to apply statements like this is equally likely or 30% likely to occur. Markets dont work like that and its a fools job to apply numbers. Even if a pattern were to show something like a 50:50 chance of it resulting in some outcome, the best you can get is then a 50:50 chance of that occuring and then thats all....after that the game changes. Multiplying out probabilities is deluding yourself in this instance.

 

Can I just clear this one up.

 

My previous post was analyzing the guy's USLV buying strategy.

 

The probability was used to demonstrate how deep he may have to dig into his pockets should the share go against him. This is a commonsense approach I apply before committing to a trade as I too buy down and it is important to me to know the likelihood that I may have to invest more than I am comfortable with.

 

I was demonstrating that he had a 3% chance of needing to buy the share at $3 and following his method of doubling up the number of shares there was a real risk he would need to invest tens of 1000s of dollars.

 

I can see nothing wrong with what I was saying, in the context that I was saying it.

[How I Trade As If Price Is Random]

1....if you think markets are random you should not be adopting an active trading approach.

The whole definition of random markets revolves around the idea that you cannot outperform a market if it is random - hence you may as well adopt a passive investment approach.

 

 

I am talking about the overall market not components which make up the market:

 

The market is merely a vehicle to drive money from one trader's pocket to another trader's pocket; equal winners and equal losers in a dollar value over the long term. It moves randomly because the value of the market on any particular day is fair value and has taken in available knowledge at that point in time; the next move is unknown as the factors relating to that move have not come into play. If you have an insider knowledge of a massive terrorist attack then yes you could sell the global market before that attack and make a lot of money but without that knowledge you have no idea what event will effect the market tomorrow. The facts that change the market are random and this is what makes the market move randomly.

 

When you see winners you are being tricked into thinking that they are all successful traders. Try an experiment on Excel by creating 1000 different traders' accounts, randomly issue buys and sells of the dji on every day for the last twenty years. You will find some of the traders will make amazing fortunes and others hopeless losses, just like in the real world.

 

If you compare a random market which is created artificially with the real market you will see that they behave in the same manner; tops and bottoms, undersold, oversold, booms, crashes everything is there in the artificial market, all the technical indicators will give their readings but they mean nothing. You cannot predict either.

 

So why invest in the stock market? Because over the long term markets outperform inflation and good profitable companies will provide healthy dividends. Individual stocks can be assessed on their fundamentals and profits can be made by careful selection. Individual components of the overall market may take longer to react to news and quick action can lead to profitable trades. Studying the fundamentals of a company may find that a share price is too cheap or too expensive. Studying fundamentals of an individual country may show their stock market is undervalued compared to another country.

 

In my opinion the global market moves randomly but many of the individual components that make the global market do not and by using fundamentals great profits can and are made.

 

Technical analysis - is futile, it is a con, it is deceptive. Sure it appears to work for some but only because of luck.

[How I Trade As If Price Is Random]

I've just compared the last two years of USLV and SLV. It looks to me that when silver drops in value you not only get the full drop in silver but you get the drop magnified by the weighting. This is the devil's child in a bear market.

[How I Trade As If Price Is Random]

For those of you who are actually learning some things from this thread…

 

When you’re setting up your scenarios and building your constructs , slide them much more closely around 50 50 than 97 – 3, etc.

(97 – 3, etc may be illustrative – but it is also produces ‘unconscious’ delusions …)

 

 

 

I am merely saying that I calculate the probability that using his current method there is a 3% probability of him executing a purchase at around $3. There is a 97% chance that he will not be required to enter at this level. It does not mean he has a 97% chance of making a profit; but by using probability it is easy to calculate his chances of making various profits and various loses. This assumes that the price movement is random which is an excellent way to test trading strategy.

 

USLV has fallen by 50% three times in eighteen months, $62 to $31 to $15.5 to $7.75 and now stands a shade above $6. What's more likely next folks $3 or $9? In my view they are equal chance but am I glad I'm not playing this game of catching falling knives.

[How I Trade As If Price Is Random]

So you are saying that there is no chance of the share falling to $3 and I am saying there is a 3% chance, let's have a show of hands

[How I Trade As If Price Is Random]

Why not?

 

If prices move randomly then after each round you have a 50% chance of the share moving up 15% or down 15%. You have already proved that you can go to round four. From this point on you have a 50% chance of executing round 5, 25% executing round 6, 12.5% chance round 7, 6.25% chance round 8 and 3.15% chance round 9.

 

I am saying there is a 3% chance that the share will go to $3 but a 97% chance it won't.

 

In a random market, which I strongly believe in, the share (at whatever its value and irrespective of where it has come from) has an equal chance of moving up by x% as it does as falling by x%.

[How I Trade As If Price Is Random]

Help me understand your silver strategy.

 

Round 1 - 185 @ 10.81

Round 2 - 400 @ 9.00

Round 3 - 800 @ 7.92

Round 4 - 1600 @ 6.01

 

Total investment after each round

 

Round 1 - 1888.85

Round 2 - 5488.85

Round 3 - 11824.85

Round 4 - 21440.85

 

I am assuming target entries are after 15% drop with a 100% increase in number of shares thus making next entry points as follows:

 

Round 5 - 3200 @ 5.64

Round 6 - 6400 @ 4.80

Round 7 - 12800 @ 4.08

Round 8 - 25600 @ 3.47

Round 9 - 51200 @ 2.95

 

Total investment after each round:

 

Round 5 - 39488.85

Round 6 - 70208.85

Round 7 - 122432.85

Round 8 - 211264.85

Round 9 - 362304.85

 

If we get to round 9 before a turnaround you will have an average buying price of 3.55 for your 102,185 shares showing a paper loss of $61,311

 

Is this correct?

[How I Trade As If Price Is Random]

Forgive me, it makes more sense now. I think if your strategy permits buying silver at a catastrophic $3 then profit will come your way.

 

It certainly isn't for the faint-hearted as the metal is very volatile. Let's hope the dow will go into reverse and the metals will make new highs.

[How I Trade As If Price Is Random]

And now back on topic, if anyone is paying attention rather than arguing, I've been trading USLV (3x weighted SLV) with this method since April.

 

I bought 185 shares @ $10.81 on April 15th.

 

On May 15th I placed an order to buy 400 shares @ $9.00 which was filled on May 17th.

 

On May 17th I then placed an order to buy 800 shares @ $7.92 which was filled on June 11th.

 

And just again for the people who don't seem to quite get what I'm saying, I never said the market is actually random, I just said that it's random to me. It might not be random, but I have no idea how to predict it, so that makes it random to me. It might not be to you.

 

My concern using this method with an individual share is that its bottom price is zero. I think you run a risk of emptying your bank roll before the price recovers. Is your next move buy 1600 shares at $6.60 and then 3200 shares at $5.60? By which time you might not be sleeping too well. What you appear to be playing is the classic Martingale (Roulette doubling up system on red black). It would be very difficult to know at what point you should get out, if the price falls to $5 you might be relieved to get back to $6 but you may still be at a loss. Also, this could be a long game, many years before a share price returns to its former highs. I've bought shares here in the UK in the past at what appeared good value, one was Marconi and the other Bradford and Bingley (Bank), both went to zero. A share price on the day is fair value, there is no such thing as a guaranteed bargain (even Directors have no idea for sure which way their company's shares will go).

 

I think any stock or index has a 50% chance of moving up and a 50% chance of moving down from its current position and that is short term, mid term or long term. What is needed is a way of trading this safely and rationally.

 

I avoid stocks like the plague, I don't know them well enough and there are too many variables so I trade the Dow against the FTSE and sometimes the SP500 against the Dow, (I buy one and sell the other). There is virtually no risk of zero. I increase my exposure when the trade is going against me but any increase is at the same level as the original, I would never play the doubling up game.

[How I Trade As If Price Is Random]

Forgive me for jumping in. I have just found this thread by googling "random markets" and I am very excited to find this forum. 1a2b3cppp's original post was a breath of fresh air and has given me great hope that my approach to trading is the right way for me. I now know I'm not alone in the belief that markets move randomly and the best way to trade is to create a system that supports this belief.

 

I have done quite a lot of research creating artificial markets produced by using the rand() function in excel. It is a fact that all the charting characteristics appear in the random data; trends some amazingly long, market crashes, stagnation it is all there in my artificial markets.

 

I have taken the daily change in the dow since 1900 and applied random order to the data. The dow starts at the same level as in 1900 and finishes at the current level. You can randomize the data as many times as you want and this creates some very interesting charts; sometimes the dow will rise to 35,000 and other times it won't break 8,000, there are usually interesting bubbles and market crashes too.

 

As I speak the dow is trading at 15,180. I think we'd all agree that one day the dow will either fall 8% or rise 8% from this point. A fall of 8% will see it breach 14,000 and a rise of 8% will see the dow at about 16,400; it will do one of these two things first, but which one? In my opinion it is a 50/50 split. The things that effect the future stock market are also in the future and without a crystal ball we have no way of knowing whether the market is going to continue to rise or is going to fall.

 

My favorite trade is the comparison between the FTSE and Dow. I like to trade the broader markets because they are usually more stable than equity trading. I trade them as a pair (i.e. short on one and long on the other) and I will increase my exposure when the trade goes against me, adhering to strict rules and patiently waiting for the trade to go in my favor before selling at my target profit. The great thing about trading this way is that you are protected from a market crash.