what is market inefficiency - page 5
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Forget about random quotes
Oleg avtomat, 2012.07.16 08:55
Now read this, so to speak, "definition" of an "efficient market" again and ponder what defines such a "definition"?
By whom is this "definition" imposed? For whom does it apply?
Such a "definition" is not just empty, and not just stupid -- it is purposefully misleading!
Be critical, after all. Don't mindlessly take for granted the nonsense from "econometrics" hammered into your brains...
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Forum on trading, automated trading systems and testing trading strategies
Forget about Random Quotes
Oleg avtomat, 2012.07.16 09:59
you are going in the wrong direction. What does it have to do with hate ... What are you talking about?
But as an econometrician you should know about the existence of an American bible book called "Econometrics". That's what I'm talking about. That's where all this nonsense about "market inefficiencies" comes from.
But if you were to get out of your econometric corridor and ask how efficiency is calculated in technology, you would see the inconsistency of such "definitions" from "Econometrics".
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How to calculate price change speed
Oleg avtomat, 2013.12.17 18:50
I don't know if it is possible to formally express this efficiency of the market? How do you determine it? What is the formula to calculate it?
If you can formally express it, then the assumption of inefficiency in the sense of a numerical characteristic makes sense.
If it can't be formally expressed, then the hypothesis is nothing more than a rubbish which has no practical use.
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Moreover, I believe that this "rubbish" is put into circulation for disorientation -- that is its true practical purpose.
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Forum on trading, automated trading systems and testing trading strategies
Forget about random quotes
Oleg avtomat, 2012.07.17 19:42
The thing is Alexei, there is a clear substitution of notions (in this kind of "definition"), like in a distorting mirror.
The category of efficiency has great theoretical and practical value - this area is engaged in the general theory of systems, there is such a direction. So, knowing what's what in this field, I can clearly see the absurdity and upside down in the fiefdom of "market efficiency/inefficiency".
Faa took offence at me, for some reason taking my criticism of such definitions as an attack on him personally, and in vain.
One of his main arguments in support of these "market miracles" is the following: "1000000 traders all over the world use it, so it's right".
What can be said about it ...
A herd of 1,000 sheep, led by a shepherd to the slaughter, walks... and each of them must be thinking in the same way "1000 of my fellows are going, so it must be so, and if I have any doubts, I cannot be right, because everyone is going, so it must be right" .... This is one side of the coin, so to speak, one truth. But there is another side of the coin, another truth - the truth of a shepherd leading the sheep to slaughter, he has his own expediency.
Now, where I'm going with this... And to the point that such 'shifter definitions' are probably not accidentally shifters....
Well, I think a reasonable person has had enough.
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Effectively said, even though it's a long time ago. Commendable.
Is it possible to formally express this very market efficiency? How do you define it? Can you give us a formula for calculating it?
If it can be formally expressed, then the assumption of inefficiency in the sense of a numerical characteristic will also make sense.
If formally it is impossible to express, then this hypothesis is nothing more than a rubbish that has no practical use.
Here is a very clear general definition: https://www.mql5.com/ru/articles/8231.
Further, to simplify and understand it, we should consider boundary variants of the price series shape. There are two opposing possibilities for a price chart - a linear infinite trend and a sine wave. It would be convenient if the chart had a sine wave shape so that everybody would know when to buy or sell an asset. It would be just as convenient if the chart were linearly ascending; then it would be obvious that you don't need to sell, you need to buy all the time and you will stay in profit. But such chart forms are not possible because there will be no buyers on the highs and no sellers on the lows. Figure 1, shows a hypothetical example of a sinusoidal price chart and an example of a price deck for it.
As can be seen in Figure 4, if the price chart is sinusoidal, when approaching the minimum there will be no buyers in the Depth of Market because we all know that the price will not go lower, but everyone will want to buy this asset when approaching the minimum. There will be buyers on the market, but since there are no willing sellers, no deals will be made and the price won't be able to move in such a trajectory. An equilibrium price will be found, at which both buyers will be willing to buy and sell.
A similar situation will occur if the price chart is linearly ascending. Since everyone knows that the price of the asset is always increasing, no one will sell, and if no one sells the asset, no one will buy it, and therefore this price chart is also impossible. It follows that in order for there to be a price chart, buyers must buy and sell. That is, someone must always be wrong in determining his or her profit. But since each participant seeks to maximize his or her profit and does not want to be wrong of his or her own volition, the graph must have the most unobvious form, it must be more complex than a sine wave and more complex than a linear ascending one.
A price chart in an efficient market must be as intermediate between linear and sine wave as possible. It should have a structure that is complex enough that the benefits are not obvious to buyers and sellers alike. A sinusoidal chart and a linear chart have low entropy. Entropy must be higher for transactions to occur. The more participants in the market and the "smarter" they are, the stronger the price graph will tend to the maximum entropy state.
If we take Shannon's entropy, it takes maximum value on a uniform distribution. Our process is not uniform, but more like a normal distribution. But it is possible to get a normal distribution from a uniform one and vice versa, moreover we use blocks with fixed step size. In other words, maximum entropy is in the process that has no regularities, probability of changing direction of every next movement is equal to 50%. But our analysis shows that the probability of change of direction in the market chart is different from 50%, so there is a memory and entropy is not maximum.
The important thing is that the market will tend to maximum entropy, but will reach this state only when there is an infinite number of participants (very high liquidity) or when they are infinitely "smart". By "smart" I mean the ability to detect complex patterns. The more complex and non-obvious patterns a participant is able to identify, the "smarter" they are. An infinitely "smart" participant is capable of identifying and exploiting absolutely all patterns. The condition (either infinitely many participants, or they are infinitely smart) stands because an infinite number of participants will have infinite computational ability, even being not very "smart" will be able to identify all patternsby brute force.
This hypothesis explains why the price charts of financial instruments are becoming more complex. If at the beginning of the 20th century one could make a profit by trading from the average, with the development of automated trading, the participants become "smarter", the patterns become more complex, entropy increases and it becomes harder to make money in the market. What do you mean, participants are getting "smarter"? They have increasing processing power, decision-making speed, the ability to determine their benefits faster and more accurately, and the ability to find increasingly complex patterns, even if by brute force.
Guys, what can I say. I'm an idiot ='(
I don't know yet, I don't know anything. I haven't seen it yet.
Here is a very clear general definition: https://www.mql5.com/ru/articles/8231
I hope everyone understands how far this "theory" is from practice...?
About as far as our MPs are from the people, when they smartly talk about how to live on 3,000 a month...
Here is a very clear general definition: https://www.mql5.com/ru/articles/8231
Where is the"very clear generic definition" of market efficiency?
Here is a very clear general definition: https://www.mql5.com/ru/articles/8231
a great explanation. a new term has been coined. Entropy has been added to patterns, inefficiencies.
Someone is turning in brass from dismantled pressure gauges - also using market inefficiencies)
is this a passing comment on this post?))