Random Market Thought.....
Nov 01, 2015 at 07:02
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4 Replies
Nov 01, 2015 at 07:02
A trader entering a market with no prior experience, knowledge or discretionary biases has an equal chance of being right as they do being wrong. This idea was made popular in 1973 by Burton G. Malkiel, an economics professor at Princeton University and it has been coined the ‘Random Walk Theory’.
I believe this theory to be true, I also believe markets trend up and down over different timeframes. Unlike Malkiel who believes it’s best to buy and hold over the long run. I believe that if a trader enters a position in the direction of the prevalent trend, then that trader has an increased chance of his position being profitable for an unknowable amount of time while that position is open. Adding the 200-day EMA to any market chart can display trending markets. If this is true, then what percentage of time are open trades profitable? And, how can a trader control their risk by managing their open trades? We can back test these questions using past market data, but past results don’t predict future profits, and it defeats the opening statement. For this experiment to work properly it needs to be front tested. There is also an issue in front testing this strategy, every time an open position becomes a closed position it is now considered past data. Meaning that the results from front testing can’t be used to predict the future either. If this is true then the opening statement must be true and flipping a coin and entering a trade can be just as profitable as trading with the trend.
I believe this theory to be true, I also believe markets trend up and down over different timeframes. Unlike Malkiel who believes it’s best to buy and hold over the long run. I believe that if a trader enters a position in the direction of the prevalent trend, then that trader has an increased chance of his position being profitable for an unknowable amount of time while that position is open. Adding the 200-day EMA to any market chart can display trending markets. If this is true, then what percentage of time are open trades profitable? And, how can a trader control their risk by managing their open trades? We can back test these questions using past market data, but past results don’t predict future profits, and it defeats the opening statement. For this experiment to work properly it needs to be front tested. There is also an issue in front testing this strategy, every time an open position becomes a closed position it is now considered past data. Meaning that the results from front testing can’t be used to predict the future either. If this is true then the opening statement must be true and flipping a coin and entering a trade can be just as profitable as trading with the trend.
Nov 02, 2015 at 12:22
I remember having a similar conversation with my cousin many years ago about random market theory n flipping coins. We used to have a white board n started doodling our own 'chart'... so much memories back then. We did try that random coin flip on an account, surprisingly it was quite positive (although mostly spent for the broker). We had fun n he was only 16 years old. Now he is doing his studies in finance! Miss those days so much! But if I didnot forget, we used a coin to set our bias direction, then drew the camarilla fib lines with good RR. I forgot how to do it, but that was our passage of entertainment. Lol
Nov 03, 2015 at 23:43
Look up Investec's monkey portfolio.
They get a guy dressed up in a monkey suit to throw darts at the news paper each year, and whatever he hits goes into the portfolio. The monkey out performs most fund managers most years. So randomness does very well in markets in fact. Directional calls are not what makes a portfolio work.
Fx is different to equities and you have to handle them differently. In equities buy and hold makes sense, in Fx it doesn't. It's unusual to have big moves in Fx. So it makes sense to trade a lot more actively.
Hope those thoughts help.
They get a guy dressed up in a monkey suit to throw darts at the news paper each year, and whatever he hits goes into the portfolio. The monkey out performs most fund managers most years. So randomness does very well in markets in fact. Directional calls are not what makes a portfolio work.
Fx is different to equities and you have to handle them differently. In equities buy and hold makes sense, in Fx it doesn't. It's unusual to have big moves in Fx. So it makes sense to trade a lot more actively.
Hope those thoughts help.
Member Since Aug 04, 2012
12 posts
Nov 05, 2015 at 07:28
I used to trade FX on demo with coinflip entry strategy and 2:1 RRR on 3 different currency pairs.....sometimes it looked positive but I quit after couple of months when I was around break-even
Think Long Term !
Member Since Nov 01, 2015
120 posts
Nov 05, 2015 at 07:39
theHand posted:
Look up Investec's monkey portfolio.
They get a guy dressed up in a monkey suit to throw darts at the news paper each year, and whatever he hits goes into the portfolio. The monkey out performs most fund managers most years. So randomness does very well in markets in fact. Directional calls are not what makes a portfolio work.
Fx is different to equities and you have to handle them differently. In equities buy and hold makes sense, in Fx it doesn't. It's unusual to have big moves in Fx. So it makes sense to trade a lot more actively.
Hope those thoughts help.
I would agree with your comment sir. It appears that adding to the 'trend' is very dangerous, because the TREND can change at anytime, and of course it would be best spotted on the lower tf. EU 1.3999 to 1.04 drop took more then 12 months to occur, but prior to that it was in a clear uptrend from 1.15 to 1.39
Many people were longing EU as it dropped from 1.39 to 1.04 because they were following the trend it had ( which was up) and we all saw the blood bath which occurred in the process. None the less, no matter what the market is doing, trending or flat, we see the same formations day in and day out, thus making currencies better for short term profit, then say stocks. Remember that no one SHORTS an IPO the moment it comes out, as most people expect a stock to only increase. Yet in currencies we are comparing one economy to another thus making the short positions as strong as the buy.
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