[dangermouseb]

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

[Adrian]

We know the markets aren't random simply because it has been mathematicvally proven.

We also know because anyone who has studied markets long enough knows it is obvious.

Perhaps the easiest way to show markets aren't random is to look at a simple distribution of daily highs and lows and where in the trading day they occur. If the markets were random, then each hour would have roughly the same nnumber of daily highs and lows. We all know that isn't the case, and isn't the case by a huge margin. So bottom line, markets aren't random. That is just one of a zillion ways markets aren't random. Only economists think markets are random.

[jttpbf]

Originally Posted by dangermouseb »

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

Generating a truly random series of data is a big task. It requires avoiding any possible slant which might be present in the method. A French trading system developer reported how he did it in his book and concluded the markets were random because the series of numbers he derived displayed some occasional trends, just like the ones produced by the markets. I believe he made a logic mistake. Two sytems leading to similar results (markets and randomness generators) are not necessarily identical. This does not minimize the value of the Artificial Inteligence and fuzzy based logic sytem he went on to develop to respond to the challenge of winning with the markets. I believe on the contrary that markets are not random but I have no formal proof of it, only arguments. The most important one is that a "random" generation by definition is one where any one event is totally independent from the previous ones. We all know that on the contrary all traders act wilfully in one of the fiollowing ways: to purchase or to sell quantities which surpass the quantities available at any one or several price levels (which moves prices) or to jump on the bandwagon when a trend develops or to take profits when the prices have reached their personal targets. These three behaivors (there might be more) seem to represent a sufficient number of events to conclude that the basic criterion of randomness is not met.

[Avarice]

Originally Posted by Adrian »

We know the markets aren't random simply because it has been mathematicvally proven.

No it hasn't.

In fact there are ever more proponents of the efficient-market hypothesis claiming that future price movements are indeed random in nature and that it is impossible to consistently beat the market over a long period of time.

On the other hand the fairly new field of behavioural finance claims that irrational behaviours of market participants have an impact on prices -- which would imply that price movements are not random.

But up until now none of these theories have been proven to be correct, so keep searching

[fugu_master]

If the markets were random, then how do some trading superstars like those in Market Wizards consistently succeed? They surely are not "lucky" given some of their 10+ year trading histories. Or the super secret algos / HFT... they're taking advantage of an edge.

"The market is random" feels like a easy excuse why a trader does not make any money - i.e. you blame an external random force.

Roulette is random, but the existence of the 00 is all the edge the casino needs to take a random process and turn it into a guaranteed money maker with enough spins.

[cw30000]

Market is random. If it is not random, why is there no 100% winning rate system?

[JS999]

Trading is a zero-sum game. This is obvious, and proven. It stems from the fact that a trade is a financial bet that you place against another human being, where only one of you can win. We cannot all trade against one another and make money, just like we can't all play poker against one another and win.

In a zero-sum game that is truly random, it is statistically impossible for anybody to make money over any reasonably long period of time. It is also impossible for anybody to LOSE money over any period of time.

A zero-sum game that had a random outcome would mean that every trade (or bet) that you placed had a 50% chance of making money, or a 50% chance of losing money, no matter what you did. An example of this would be a betting game where you and I rolled a 6-sided die, and if the numbers came up 1,2, or 3 I would pay you $100 and if it came up 4, 5, or 6 you would pay me $100. If we each started with $1 million and played this game for 100 million years in a row, do you know how much money we would have at the end of this time? Correct, approximately $1 million each. There would be periods of time where I won 30 bets in a row and periods of time where you won 30 bets in a row. There would be NO period of time where that die was rolled and I won 33,678 times in a row. That is, for all intents and purposes, statistically impossible. The universe would come to an end before that occurred.

It is statistically possible to get lucky and win the lottery. It is statistically possible to get lucky and win the lottery twice. It is NOT possible to get lucky and win the lottery 97 times in a row. That has never happened, and will never happen to anybody, unless they manage to rig the outcome somehow. There is a greater chance of the entire earth being swallowed by a giant pink space-faring toad in the next 5 seconds than there is of anybody randomly winning the lottery 100 times in succession. The universe will END before this occurs.

The amount of people that lose money in the markets day after day is so consistent and so overwhelming that it cannot possibly be random. It is not the equivalent of winning 30 bets in a row in that game I talked about earlier, it is the statistical equivalent of winning 10,000 bets in a row. Every new trader that opens up an account blows through that money quickly and consistently. That money has to be going somewhere in a zero-sum game, it is not being destroyed or burned.

It cannot be going to the exchanges or the brokerage houses in terms of fees, because otherwise those companies would eventually end up with all of their customer's money. (This would be the case if the market was truly random with nobody making or losing money, but where people were just bleeding money to the exchanges and brokerage houses with every trade.) Since those companies are not making vast quantities of money that equal all of the losses that most people incur, we know that this is not occurring. Therefore, it MUST be going into the accounts of winning traders - that is the only possibility.

Take a look at Las Vegas. Are you seriously so stupid that you believe that the casinos are taking money from their customers because they are just LUCKIER than the people who walk in the doors? Of course not. Those games are statistically rigged, and it is impossible for a casino to lose money if they keep their bet size small enough and place enough bets against enough people. Over millions of bets, the chances of a casino losing money in a year because all the shmucks just got "lucky" is just about exactly ZERO. It is not random, it is because they have an edge. You don't have to find a system that wins on 100% of bets to prove that the market is not random, you just have to understand basic Grade 10 statistics and realize that trading is a zero-sum game in which most people are bleeding out money like water.

The way that money is being lost in the markets by a vast majority of participants is very similar to what is going on in Las Vegas. The losing traders are the customers, and winning traders are the house. In fact, I would be that it is being lost faster and more consistently in the markets than people are losing when they walk into a casino. This is for all intents and purposes, statistically impossible in a zero-sum game that has a random outcome for each bet.

Ergo, the market is not random. Ever notice how the only people who think the market is random are losing traders who want to make themselves feel better about their lack of skill, or mathematicians who have never traded a day in their lives? I don't know how this stupid theory ever lasted more than 30 seconds, but I can assure you, it is definitely not random, has never been random,and never will be random. There is a lot more that I could say about all this and many other things, but after all this is a zero sum game and there is a limit to how much I feel like helping out my opponents. If you want to be silly and believe that it is all random, by all means go ahead - it is only going to help me even more in taking your money.

[Adrian]

@Avarice Yes it ha. End of story. My question to you is, why are you here? Why are you commenting on this thread? Clearly you believe markets are random in which case trading is a pointless exercise for you. Therefore, why would you waste your time being here on this site?

@fugu Even if the markets were random, there would still be a distribution curve of big winners and big losers in the markets. Mind you the chance of making money every year for 10+ years is so far at one end of the curve as to be an alm,ost statistical improbablility. And this is what the research constantly shows (despite Avarice's ignorance). It shows the markets regularly have moves that go well beyond the normal gaussian distrtibution, allowing trend followers to make money, when statistically they should not be able to.

There are countless studies showing the benefits of using momentum to make money. Fascinatating that Avarice can't find any of them, and naively thinks more research is showing the opposite. Clearly he is reading research by people who are already disbelievers and want to prove their point. Simply because a person cannot find non-randomness, does NOT mean markets are random.

@cw30000 That is the most absurd statement ever and shows a fundamental misunderstanding of what noon-random means. The markets are full of noise, enabling a good trader to only have a small advantage on balance, and generally prevents them from achieving 100% winners. Take blackjack. In the old days it was possible to make money by card counting, but only a fool would think it meant being able to win 100% of hands. One only needs to win > 50% of the time to create and advantage. Same goes in poker. Professional winning players regularly lose hands simply because of the randomness of the cards. But even though the cards are totally random, they still win due to applying their skill.

@JS999 Markets are NOT z zero sum game. In futures is is negative as their are trading costs. In equities, well when the markets go up the vast majority of people win, and when they goes down the vast majority lose when wealth is destoyed. The short positions represent only a tiny fraction of the longs here. So once again, please don't make statements saying something is proven when you clearly don't understand what you are saying. This is much of the problem in the world today. Everyone thinks their opinion is fact, when much of the time is isn't.