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Vince Heiker wrote:
>I wrote this in reply to the subject question from a member at another
>trading message board: are the behaviors of the markets random or not?
You make very good points, but you forget one that I think is the
most important:
The market isn't even MATHEMATICALLY random.
True, folks have won Nobel Prizes for concepts like the Capital
Asset Pricing Model and the Black-Scholes Option Pricing Model. All
these things embody an underlying hypothesis that markets move like
a random walk. It is easy to show that markets don't move like a
random walk.
A random walk is where you start with some number, add a random
number to it, add a random number to the result, add another
random number to the result, and so on. You get a plot that looks
remarkably like a market, with trends and swing points.
It doesn't matter if the random numbers you're adding are uniformly
distributed, normally distributed, or whatever. A random walk, by
its nature, has one feature that always holds true: Values that
are a constant N periods apart will always conform to a gaussian
probability density function (a normal distribution, standard
bell-shaped curve). That is, the probability that a price N periods
in the future will be at some level relative to the current price,
will be governed by a gaussian probability curve.
If you plot the probability density function of any market, you will
find it's not gaussian. The distribution has a higher sharper peak,
and fatter tails, than a gaussian distribution. Therefore markets
are not random walks.
--
,|___ Alex Matulich -- alex@xxxxxxxxxxxxxx
// +__> Director of Research and Development
// \
// __) Unicorn Research Corporation -- http://unicorn.us.com
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