Sep

27

SartreA big part of trading is determining ahead of time where prices will be, for profit. You can use what has transpired as a rudder to achieve this goal, or you can go on the assumption that future events are independent of current events. In the first thought, there is a hint of determinism and fatalism. Every event yet to occur in the future is more or less scripted. In the second case, there is the strictest acceptance of free will, or whatever is yet to happen acts independently of what has happened.

Which is correct? I feel these perspectives coexist in that things at times are predicted with great accuracy but at others times it seems futile. Is time the bridge between fate and free will? Luck either bad/good the conduit? Last night I sat back to take a look at the big picture. Deeply appreciating the tools of counting and the law of ever-changing, these questions popped out.

Phil McDonnell explains:

The ultimate question. Is our fate (and trading success) predetermined or do we have some control over it?

Perhaps a better way to express the problem is through the paradigm of statistical thinking. In statistics the central concept is randomness. Randomness is actually a very deep philosophical issue. It is not the same for all people. Rather randomness depends greatly upon what you know, and different people know different things.

Suppose a company has a great quarter. During the quarter many employees will have a pretty good idea that the quarter is going well. Those at the top such as the CEO and CFO will have a very clear picture. After the end of the quarter the outside auditors may get a good idea as well. Then some time later the earnings report is released to the public and the stock moves unexpectedly. To the outside investor the event seemed random and unpredictable. But clearly someone knew.

The central point is that from the perspective of those who knew of the coming announcement in advance the event was not completely random. From the perspective of those who knew nothing the event was unexpected and seemingly random. Randomness and non-randomness can coexist in different people with different information. So then the best definition of randomness must ultimately be egocentric. What is random to me is that which I do not know and cannot predict.

This concept can be quantified very nicely by various statistical ideas. For example when one performs a regression analysis of something like the Fed Model there is a statistic called the R-squared which embodies the percent of the variance explained by the model. So if the R squared was 30% the model explains 30% of the variance leaving 70% unexplained. If we only use the Fed Model as our predictor then the world is 30% less random than before but 70% is still random to us because our knowledge is limited to that model. A little counting can greatly reduce the randomness in our trading.

David Lamb extends:

Through experiences in my life I have come to understand that when I brainstorm with someone upon an idea or topic it seems as though the sum of our thoughts exceed that of only two persons, as if 1+1=3.

If this is true, is it possible that nothing is really random, given a number of participants that are knowledgeable in a given arena? For instance, if we took the topic of market direction and asked each Daily Spec contributor to give his thoughts on the subject along with providing his reasons why, then produce quantifications with qualifications, could each of our random market movements that we experience be sufficiently squashed?


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