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[generating a random walk in Excel]
> Trend lines, retracements, consolidations, breakouts, Support,
>Resistance, Head and Shoulders, double tops, V-shaped
>bottoms...........etc....etc.
>
>Any pattern you like in fact.
>
>They are all there if you have an eye for them.
>
>AND ALL ON CHARTS THAT ACTUALLY ARE RANDOM WALK!
But markets are NOT random walks, as you can clearly demonstrate if you
plot a distribution of periodic returns. A random walk will always have
a normal distribution. Markets don't. Markets exhibit a distribution
having fatter tails and a sharper peak than normal. The distribution
can be modeled by the Stable Pareto family of distributions having a
non-integer exponent (the Gaussian is a special case of the Stable
Paretian family, and the only case having a finite variance). Market
distributions have an infinite variance.
This difference in gaussian versus actual distribution is clearly
illustrated by the implied volatility smile which is an artifact
of the Black-Scholes option pricing formula assuming a normal
distribution of future returns when no normal distrubtion exists.
A further demonstration you can do is measure how well a market
trends against a random walk. If you pick some fixed number N
periods, the distance you can expect a random walk to move is
proportional to the average daily movement (in your case 1.0) times
the square root of N. Such is not the case for markets. Currencies
typically trend more strongly, for example, and grains like wheat
trend more weakly than a random walk.
A random walk may look the same as a market on the surface, but it's
not the same at all.
--
,|___ Alex Matulich -- alex@xxxxxxxxxxxxxx
// +__> Director of Research and Development
// \
//___) Unicorn Research Corporation -- http://unicorn.us.com
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