My trading strategy based on the random walk hypothesis

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  1. #1
    Stance's Avatar
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    Default My trading strategy based on the random walk hypothesis

    Random walk hypothesis - Wikipedia, the free encyclopedia

    Burton G. Malkiel, an economics professor at Princeton University and writer of A Random Walk Down Wall Street, performed a test where his students were given a hypothetical stock that was initially worth fifty dollars. The closing stock price for each day was determined by a coin flip. If the result was heads, the price would close a half point higher, but if the result was tails, it would close a half point lower. Thus, each time, the price had a fifty-fifty chance of closing higher or lower than the previous day. Cycles or trends were determined from the tests. Malkiel then took the results in a chart and graph form to a chartist, a person who “seeks to predict future movements by seeking to interpret past patterns on the assumption that ‘history tends to repeat itself’”.[5] The chartist told Malkiel that they needed to immediately buy the stock. When Malkiel told him it was based purely on flipping a coin, the chartist was very unhappy.[citation needed] Malkiel argued that this indicates that the market and stocks could be just as random as flipping a coin.

    The random walk hypothesis was also applied to NBA basketball. Psychologists made a detailed study of every shot the Philadelphia 76ers made over one and a half seasons of basketball. The psychologists found no positive correlation between the previous shots and the outcomes of the shots afterwards. Economists and believers in the random walk hypothesis apply this to the stock market. The actual lack of correlation of past and present can be easily seen. If a stock goes up one day, no stock market participant can accurately predict that it will rise again the next. Just as a basketball player with the “hot hand” can miss the next shot, the stock that seems to be on the rise can fall at any time, making it completely random
    I'm going to paper trade this, and report my results. Using a combination of day trading and 1-day holds, I'm going to buy/sell random stocks at random times based on no research or trend analysis what so ever.

    Going to give myself $5,000 w/ 3% stop losses for this experiment.
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    Hmm. Good luck.
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    A.D
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    If you're picking stocks based on 50/50 probabilities, then your long run balance is going to regress back to your starting balance +/- a few dollars for variance. Not to mention, every trader knows that predicting whether or not a market will be up or down on the day isn't even coming close to the tip of the iceberg. There are a billion other variables you must consider.

    This is quite possibly the most ill advised trading strategy I've ever seen. The market is not random. Not even close. Anyone who tells you it is has never made a dime trading markets.

    As for the NBA example, who in the world expects previous shots to predict future shots? The best players in the game shoot at 50 - 60%. If they're talking about shot positioning then OK, but once you factor in fatigue (increases every possession), pace (arguably decreases every possession), PPP etc it's almost impossible to expect an NBA player to mimic the same stroke and technique every shot. In last years finals, LeBron was guarded by a rotating plethora of defenders on the Spurs team, how do you expect he'd be attempting the same shots against Tim Duncan and Manu Ginobili? You can argue ''well all else constant'', but then that's just unrealistic in terms of the game.
    Last edited by A.D; 03-11-2014 at 07:34 AM.

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    long:
    jcp @ 9.08
    f @ 15.34
    csco @ 21.69
    vale @ 12.58
    znga @ 5.81
    "HEY Panda, we don't take too kindly to your types around here!" "Now skeeter, they ain't hurtin no body"
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    Below you will find an image of the technique and results.

    BA-AX509_OV_ill_D_20111231005931.jpg
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    This should end well.
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    It's just a paper trade so there's no harm in trying it out. At this point it's just a fun little experiment. I assume you'd never actually try this with your own money anyways.
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    A.D
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    So... Down on every single one so far? Haha

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    As long as ur not playing with real money, go for it and enjoy the learning experience
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    sold long positions:
    jcp @ 9.08 / closed @ 8.96
    f @ 15.34 / closed @ 15.34
    csco @ 21.69 / closed @ 21.69
    vale @ 12.58 / closed @ 12.60
    znga @ 5.81 / closed @ 5.59

    +36.00
    "HEY Panda, we don't take too kindly to your types around here!" "Now skeeter, they ain't hurtin no body"
    “Jessie, you asked me if I was in the meth business or the money business. Neither. I'm in the empire business.” –Walter White
    "Act as if... " - The boiler room

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