How Randomness Theory of Forex Is Nifty? - General

Wayne Ovenstone 2009.01.07 19:23 #91

Wayne Ovenstone 2009.01.07 19:25 #92

Continued from the previous post........................

As for you and me, lone speculators trying to make a buck, we are well advised to ignore the whole ballet. If the June forecasts are going to be superseded by September ones, and they by still more sets in November and December, why listen at all? Accepting such a prophecy is like buying a ticket that is scheduled to expire before the play is performed.

Not all oracles have been able to organize the annual forecast-revising dance of the economists, but all are followers of the basic rule. They all forecast often and hope nobody scrutinizes the results too carefully.

It has always been thus. Michel de Nostredame, an obscure sixteenth-century French doctor, turned out hundreds of prophecies in the form of tangled four-line verses. He is known today by the Latin form of his name, Nostradamus, and is revered by a cult of believers. He is supposed to have predicted things such as air warfare and radio communication.

Well, maybe. The verses are in such indirect, mystical language that you can interpret any of them to prove anything you want to prove. Leaning over backward to be charitable to the ancient seer, I once studied a hundred of his prognostications and ended with the following statistical summary: Three forecasts were correct, eighteen were incorrect, and the remaining seventy-nine were such dense gibberish that I simply didn't know what the old Frenchman was driving at.

Not a very impressive record. Yet Nostradamus managed to make a name for himself in the world of prophecy -- a name that any modern oracle would love to equal.

Nostradamus wasn't often right, but he sure was often.

Or take a modern future-gazer, the self-advertised psychic Jeane Dixon. She is famed for some right guesses, principally one: a prediction of President Kennedy's assassination. Amazing, right? Sure, but what isn't so well publicized is a list of all her wrong guesses. According to Ruth Montgomery, Mrs. Dixon's biographer-disciple, the renowned clairvoyant predicted that Russia and China would unite under one ruler, that CIO chief Walter Reuther would run for President, that a cure for cancer would grow out of research begun early in this century, that . . .

Well, you see the point. The Committee for Scientific Investigation of Claims of the Paranormal, a scholarly group based at the State University of New York at Buffalo, studied Jeane Dixon's record and found it to be no better than that of an ordinary man or woman making guesses.

It is easy to get dazzled by a successful prophet, for there is a hypnotic allure in the supposed ability to look into the future. This is especially true in the world of money. A seer who enjoys a few years of frequently right guesses will attract an enormous following -- so big a following, in some cases, that the seer's prophecies are sometimes self-fulfilling.

Such was the case with Joseph Granville, the stock market oracle. So many people were basing decisions on Granville's forecasts in the early 1980s that when he said something was going to happen, it happened because they believed it would. That is, when he said the market would go down, the prediction scared buyers out of the market -- and lo, it went down.

This happened early in 1981, when Granville told his disciples to sell everything. The day after this famous warning was issued, the stock market fell out of bed --23 points on the Dow. All of Wall Street said ooh and ah. What a powerful prophet was this Granville! The plunge was brief but impressive while it lasted.

If you had then been a student of the Zurich Axioms, it might have seemed to you that here was an exception to the teaching of the Fourth Axiom. Though most prophecies aren't worth two cents, might it not be a good idea to put one's money on a seer like Granville? If his forecasts are self-fulfilling, aren't you all but sure to win by doing what he recommends?

No. Not even self-fulfilling prophecies self-fulfil reliably. Later in 1981, Granville launched another test of his prophetic power. His crystal ball told him the market would plunge again on Monday, September 28. He announced this to the world. Some speculators sold stock short or bought puts on the strength of it. They, like Granville, were convinced the plunge was coming.

Instead, the New York Stock Exchange that day scored one of the biggest price gains in its history, and a day later, markets in Europe and Japan followed suit.

Some of Granville's followers were baffled, but they need not have been. They had merely had it demonstrated to them that Granville is like anybody else: He wins some and he loses some.

Every prophet is right sometimes and wrong sometimes -- more often the latter, but you can't tell in advance which it is going to be. To be in a position to tell, you would have to make predictions about the prophet's predictions. If you were that good at predicting, you wouldn't need the prophet. Since you aren't that good at it, you can't count on anything the seer says.

So you might as well forget the whole fruitless exercise of trying to catch a glimpse of the future.

Let's look at another example. Back in 1970 a financial editor, columnist, and oracle named Donald I. Rogers published a book entitled How to Beat Inflation by Using It. This book was notable for containing the magnificently wrong advice that one should not buy gold. However, we can forgive Rogers that forecasting failure. Gold was a common blind spot in crystal balls of the time. What is more interesting is this prophet's listing of common stocks that he thought would do well in the years ahead.

Rogers reasoned that land would be a good hedge against inflation. Therefore, he figured, it would be a good idea to buy stocks of companies that owned a lot of land. He listed stocks to buy on that basis.

Some of his recommendations have turned out pretty well in the years since. Warner Communications, for instance. If you had bought this stock in 1970, you could have sold out at a handsome profit at various times until trouble struck the company in mid-1983. Other recommendations on Rogers's list, such as ITT, have turned out miserably.

The question is: If you had read Rogers's survival manual in 1970 and accepted some of his prognostications, how would you have fared?

Well, it would have depended on your luck. If you had picked winners from his list, you would have won, and if you had picked losers, you would have lost. Luck was in control of the outcome all the time. That being so, one can ask what was the sense of listening to the prophet in the first place.

It may seem unfair to pillory Rogers and other oracles on the basis of hindsight. It is easy, after all, to sit here today and say what was and wasn't a good speculation in the 1970s. A prophet might be excused, perhaps, for challenging me: "See here, Gunther, what gives you the right to catalogue all our wrong guesses? Could you do better? Are you such a hot prophet?"

Ah, a good question. No, I'm not a prophet, and that is just the point. I've never made any serious attempt to read the future (though of course I'm always wondering about it), have never said I could read the future, and indeed have just spent many pages saying it can't be done. But the people we've been criticizing here are men and women who claim they can see ahead. They have set themselves up as oracles, they accept money for their prognostications, and they are aware, or should be, that there are people who reach important decisions on the basis of what they say. It seems perfectly proper, therefore, to hold these prophets accountable for what they predict. If they are selling a prediction service, we have a right to subject that service to critical scrutiny and find out how good it is.

The conclusion is that it isn't very good. You cannot profit by listening to a prophet.

There are things that can be predicted. We know precisely when the sun is going to come up each morning, for instance. Tide tables are prepared months ahead. The free calendar I get each January from the bank says what the moon's phases will be throughout the twelve months ahead. Weather forecasts are less precise but still are reasonably trustworthy and getting more so.

The reason why such things can be predicted, and why the predictions can be trusted, is that they are physical events. But the Zurich Axioms are about the world of money, and that is a world of human events. Human events absolutely cannot be predicted, by any method, by anybody.

One of the traps money-world prophets fall into is that they forget they are dealing with human behaviour. They talk as though things like the inflation rate or the ups and downs of the Dow are physical events of some kind. Looking at such a phenomenon as a physical event, an oracle can understandably succumb to the illusion that it will be amenable to forecasting. The fact is, of course, that all money phenomena are manifestations of human behaviour.

The stock market, for example, is a colossal engine of human emotion. Prices of stocks rise and fall because of what men and women are doing, thinking, and feeling. The price of a given company's shares doesn't rise because of abstract figures in an accounting ledger, nor even because the company's future prospects are objectively good, but because people think the prospects are good. The market doesn't slump because a computer somewhere determines selling pressure is on the rise, but because people are worried, or discouraged, or afraid. Or simply because a four-day weekend is coming and all the buyers are off for the seashore.

Continued...................................

Wayne Ovenstone 2009.01.07 19:25 #93

Mladen Rakic 2009.01.08 09:38 #94

Nothing to do with SMA, but that does not matter at all (stopped playing "guessing games" a long time ago)

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Some of the reasons I disagree with "randomness theory" of forex:

Basis for that theory is that the number of participants in forex market is, by now, so wast, that that number itself is causing the "randomness". As appealing it seems, that theory has a couple of assumptions that are simply nonsense :

assumption 1: every participant in forex market is illiterate
assumption 2: every participant in forex market is a moron (and moron stands for moron not "moron" (moron meaning incapable of digesting "outer world" information)) and is "flying" around as a "decapitated fly"
assumption 3 : is that the "big dogs" and brokers are smart

Of point 1 : the assumption is that participants, being illiterate, are unable to reach information (whatever kind of information). Thanks god, who ever is capable of writing a check to his broker is not illiterate, and thanks to "information freeway" when every village has its high speed internet, information is not delayed to those "illiterate participants" of forex.

Of point 2 : no point in elaborating that point (except that maybe the biggest concentration of "morons" happen to be on the brokerage companies floors - and I am not going to argue about that) and that this point is mostly used to convince people that their place is where they are at the present ("you got what you deserved" theory)

Of point 3 : I simply adore those movie representations of "super smart" floor brokers and market makers. It is and has been my "reason for being" in this life The only thing they have in common is greed and nothing but the greed ("one more banana on my account" and one more element that adds to "randomness" : their greed seems to be too often the same withe the one that is considered the "most successful one" in "banana picking")

Randomness is used too often as an excuse for loses (but funny enough, whenever there is a gain, there is also a "I knew it" somewhere) People (the participants of the "wast forex market") are, on the other hand, anything but random (to my regret, because if they were, no one could "make" and "provoke" wars). Does not matter what drives them (it could be Nostradamus himself, as far as I am concerned) but they are driven (just see GBPJPY for "randomness")

As of Nostradamus : in the flood of modern "nostradamuses" (advisors, analyzers, system sellers, "super minds", preachers, and so on, and so on...) I try to walk without stumbling upon one of those. Already have developed quite an effective strategy (the one you all might know from your "real life"). Whenever someone tells that something is good for me and that what he/she does is done for my benefit, I simply turn away and ignore it

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that is all folks

no more "explanations" from me

happy pips to all (random or not)

Mr.Marketz:
I was reading some stuff about the famous prophet, Nostradamus... and found the following statement about his abilities to "see the future". It seemed fitting to drop it in this thread.

And I quote...

"His prophecies have a magical quality for those who study them: they are muddled and obscure before the predicted event, but become crystal clear after the event has occurred."

Reminds me of my last my last SMA crossover strategy

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iGoR 2009.01.08 12:04 #95

Forecasting Financial Time-Series Introduction.

This article deals with one of the most popular practical applications of neural networks, the forecasting of market time-series. In this field, forecasting is most closely related to profitableness and can be considered as one of business activities.

Forecasting financial time-series is a required element of any investing activity. The concept of investing itself - put up money now to gain profits in future - is based on the concept of predicting the future. Therefore, forecasting financial time-series underlies the activities of the whole investing industry - all organized exchanges and other securities trading systems.

Let's give some figures that illustrate the scale of this forecasting industry (Sharp, 1997). The daily turnover of the US stock market exceeds 10 bln US dollars. The Depositary Trust Company in the USA, where securities at the amount of 11 trillion US dollars (of the entire volume of 18 trillion US dollars) are registered, marks approximately 250 bln US dollars daily. Trading world FOREX is even more active. Its daily returns exceed 1000 bln US dollars. It is approximately 1/50 of the global aggregated capital.

99% of all transactions are known to be speculative, i.e., they are not aimed at servicing for real commodity circulation, but are performed to gain profits from the scheme: "bought cheaper and sold better". They all are based on the transactors' predictions about rate changes made. At the same time, and it is very important, the predictions made by the participants of each transaction are polar. So the volume of speculative transactions characterizes the measure of discrepancies in the market participants' predictions, i.e., in the reality, the measure of unpredictability of financial time-series.

This most important property of market time-series underlies the efficient market hypothesis put forth by Louis Bachelier in his thesis in 1900. According to this doctrine, an investor can only hope for the average market profitableness estimated using such indexes as Dow Jones or S&P500 (for New York Exchange). However, every speculative profit occurs at random and is similar to a gamble. The unpredictability of market curves is determined by the same reason for which money can be hardly found lying on the ground in busy streets: there are too many volunteers to pick it up.

The efficient market theory is not supported, quite naturally, by the market participants themselves (because they are exactly in search of this "lying" money). Most of them are sure that market time-series, though they seem to be stochastic, are full of hidden regularities, i.e., they are at least partly predictable. It was Ralph Elliott, the founder of technical analysis, who tried to discover such hidden empirical regularities in the 30's.

In the 80's, this point of view found a surprising support in the dynamical chaos theory that had occurred shortly before. The theory is based on the opposition of chaos state and stochasticity (randomness). Chaotic series only appear random, but, as a determined dynamical process, they leave quite a room for a short-term forecast. The area of feasible forecasts is limited in time by the forecasting horizon, but that may be sufficient to gain real profits due to forecasting (Chorafas, 1994). Then those having better mathematical methods of extracting regularities from noisy chaotic series may hope for a better profit rate - at the expense of their worse equipped fellows.

In this article, we will give specific facts confirming the partial predictability of financial time-series and even numerically evaluate this predictability.next article :

Forecasting Financial Time-Series - MQL4 Articles

In this article they make a very complicated study on trying to proof that the markets or time-series are predictable or can be forecasted.

At the bottom of this article you can read the conclusion of their research.

That I personaly find the most interesting part:

QUOTE: We demonstrated that (at least some of) market time-series were partly predictable.

Depending on a believer or a non-believer what does this proof?...

The camp of the believers is going to say: You see one can predict the markets.

The camp of the non-believer ( where I belong to) is going to say: On the contrary with this you gave proof that it is not predictable. If it is only sometimes and then even partly so that gives proof that it is not predictable. A true scientist will say if you want to proof someting you need to give proof of it repetifly and in any kind of circumstances and inviroment in a controled way (meaning that somebody can not say...well at home it works but here in the labarotory it doesn't).

If it is only now and then or occasionly that someting is true then that is the counterproof to say it does not work.

I stick to that. What's the use to bring out a medicine on the market that sometimes can work and sometimes does not work.... or that is nearly moving to the paranormal: at home all alone I can talk with gost and move object with my mind but amongst scientists who would like to witness, I can't...

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SIMBA 2009.01.08 22:45 #96

inferiority complex sublimation

KaMpeR:
LOL, this is getting funnier by the minute.

Wayne,

It was funny...BUT..now it looks like it is becoming repetitive...and Minibrain has shown such a strong need to sublimate a massive inferiority complex that it has become unnecessary to continue stating the obvious...I will accept the wisdom of your PM and stop here.

Thanks for your kind words

Simba

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solaiman 2009.01.10 21:17 #97

Neural Network forecasting

iGoR:
Forecasting Financial Time-Series Introduction.