|
:: here's why markets
turn
random
walk or controlled moves? The role of 'profit arbitrageurs' in why
markets turn
back
|
|
NOTE:- "Why Markets Turn" has been registered as a trademark by "Morikawa, Dan", the owner and operator of the website "whymarketsturn.com" on Nov 13th, 2006. This article is nothing to do with either Mr Morikawa, or his astrological software prediction method, and all trademarks are hereby duly acknowledged. To read more about Mr Dan Morikawa and his allegations of 'copyright infringement' aganst this website, click here Market Turns
based on probability
Most traders
at some point in their careers spot this '50%' notion and figure
out that maybe there is a trading opportunity in it. As they say
in casinos, 'the table doesn't remember', but the market, of course,
does (well, it does appear to have a short term memory at least!).
They then surmise that if, for example, the market DIDN'T turn yesterday,
then the chances of it NOT turning today are 50% x 50% i.e. only
25% making what appears to be a good bet. Furthermore, they go on
to decide (using spreadsheets, usually!) that if horror of horrors,
it doesn't turn today either, then the probability of it not turning
tomorrow must be 50% x 50% x 50% i.e. only 12.5% which means (in
their opinion!) that there is actually an 87.5% chance that the
market WILL turn tomorrow! Good trade or what?! Not!!
Weakness in
the probability theory
This game can
be played ad infinitum, giving by the 8th day a supposed almost
100% chance of the market doing something particular tomorrow. This
is the basis of a number of popular systems, including ebooks promoting
this method to the detriment of many trading accounts. The flaw,
of course, is obvious. Although the maths may be sound, the likelyhood
of coming across a string of outcomes that gives you the chain of
days becomes less likely the more days you factor in. So for example,
the likelyhood of seeing 3 straight down days in a row is so small
that although the 4th day's probability of another down day may
very well be 6.25%, the unlikeliness of such a chain occurring in
the first place, when multiplied by that 6.25% is... you guessed
it... close to 50%. In other words, no matter how you twist the
numbers, it is as likely to go one way as 'tother tomorrow.
Predicting
Market Turn points
Any sane person
will probably agree with the assertion that it is, in fact, impossible
to foretell the future, in any area of existence, not just trading.
If this wasn't so, whoever had that ability would be able to exploit
it very quickly to achieve a total dominance in that particular
area (and other areas too, no doubt). Since this doesn't happen
(except within the confines of lame 'b' movies) sanity forces us
to conclude that the best we can do is construct a range of possibilities
about tomorrow, which after all, will be no mean achievement. Websites
promoting supposed '100% accurate systems' such as www.whymarketsturn.com
should read on! More...
|
|
