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Are random trading strategies more successful than technical ones?

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Re: Are random trading strategies more successful than technical ones?

#21

Post by twofornone »

Technical analysis sort of "works" in the same way that e.g. astrology "works", in that for any given plot of stock data, you can typically draw a of a number of technical patterns which seem to fit. I've never seen any convincing evidence to the contrary.

But one thing is for sure, if technical analysis works then a neural net will trivially pick up on existing strategies and although the cutting edge is always kept secret in the financial world, we probably would have heard of ML techniques rediscovering technical analysis by now if it were truly successful, since even an amateur could build and train a neural net from free data to learn technical analysis.

P.S. if simple technical analysis techniques ever worked, I also predict that they would quickly stop working as such arbitrages eventually disappear. You're not trading against news or patterns, ultimately, whether traders realize it or not, they are trading against mass financial psychology and HFT algos. Once neural net based training becomes the predominant tool, it will be interesting to see the collective patterns that emerge, likely totally disconnected from actual fundamentals. It may be chaotic, or it may be close to steady state, but it will definitely be in a state of flux as neural nets come online and constantly train on the latest patterns. It's a battle against the arrow of time.

Re: Are random trading strategies more successful than technical ones?

#22

Post by stouset »

rubyn00bie wrote: post #17

Prices are pretty well modeled using Brownian motion. Most economists should know this while almost no one in the normal population will be aware of it. Sometimes people are just lucky, but overall the more trades you make the more you'll converge on the average return rate. I would also like to note, that predicting price is different from predicting an overall increase in the value of the underlying security. https…

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

Re: Are random trading strategies more successful than technical ones?

#23

Post by pessimizer »

paulpauper wrote: post #5

>Recently Taleb has brilliantly discussed in his successful books [15], [16] how chance and black swans rule our life, but also economy and financial market behavior beyond our personal and rational expectations or control. Actually, randomness enters in our everyday life although we hardly recognize it. Therefore, even without being skeptic as much as Taleb, one could easily claim that we often misunderstand phenome…

> Consider this obvious thought experiment: given a choice between having to choose between a $10 bill or a $20 bill on the sidewalk, all else being equal, everyone will choose the $20.

All else is never equal. If you change this experiment slightly, you'll get a more interesting result. If there is a $10 bill and a $100 bill on the sidewalk, and you have to choose one to take and one that will return to its owner, most people will choose the $10. The $100 seems suspicious and dangerous (in a "mystical and unpredictable" way.)

Quality is determined by experience and instinct. The personal valuation of a $100 bill might drop below $10 with no added information, other than that all treasure looks less like treasure than a lot of trash does.

Suffice it to say that if there were a market that accurately labeled the values of everything it sold, it wouldn't be a very interesting market.

> the FAANG index in which each company is worth at least $100 billion has pretty much beaten everything else since 2009.

That's because the politics are affected by size. To big to fail is real.

Re: Are random trading strategies more successful than technical ones?

#24

Post by sideshowb »

Aerroon wrote: post #11
Root_Denied wrote: post #9

Earlier quoted context omitted.

>the FAANG index in which each company is worth at least $100 billion has pretty much beaten everything else since 2009. In some sense I think this speaks more to the way that the US regulatory framework allows dominant players in a given market segment to retain and reinforce their dominance. You can argue that these type of investments are "quality" or "safe", but the reasoning behind that label isn't going to be b…

They're also information technology companies. Maybe it shows just how of a part of daily life they are? The only ones whose I don't interact directly with (intentionally) on a daily basis are Apple and Facebook. For most people Facebook would be included in their daily use. How many other companies are there that aren't IT related that you interact with on a daily basis? You might use your chair and toothbrush every…

Tesco. I can't eat likes. Oil companies also, though I hate to admit it.

Re: Are random trading strategies more successful than technical ones?

#26

Post by kriops »

JustFinishedBSG wrote: post #18
habibur wrote: post #10

Doesn't the conclusion indirectly also indicate that day trading is a zero sum game? If the answer is yes, then the only way you can make money from day trading is from commissions you earn performing day trade on behalf of other parties with money.

This is a misunderstanding of zero-sums games. Zero-sums game are actually proven to have a winning strategy. Chess is a zero sum game.

Chess is not believed to be a forced win for either player though.

Re: Are random trading strategies more successful than technical ones?

#28

Post by veeenu »

cschmidt wrote: post #6

This reminds me a bit of a classic paper called "1/N". It compared a portfolio of putting equal money into each security, vs a bunch of fancier approaches. The 1/N almost always won. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=911512

This is widely known among practitioners, but there is a caveat -- a 1/N portfolio bears a much higher risk than, say, a cap-weighted portfolio or a risk-parity asset allocation. A 1/N portfolio receives an equal contribution in terms of volatility from each asset, meaning that very risky assets significantly increase the portfolio's volatility, while not necessarily contributing proportionally better returns, due to the nonlinearity and asymmetry of volatility's effects on prices. This way, 1/N ends up performing very poorly on a risk-adjusted basis while undoubtedly at the same time outperforming any other kind of allocation on the basis of return alone. This is rather unacceptable in a real world portfolio where the tail risks and emotions can lead an investor to ruin.

Re: Are random trading strategies more successful than technical ones?

#29

Post by myownpetard »

paulpauper wrote: post #5

>Recently Taleb has brilliantly discussed in his successful books [15], [16] how chance and black swans rule our life, but also economy and financial market behavior beyond our personal and rational expectations or control. Actually, randomness enters in our everyday life although we hardly recognize it. Therefore, even without being skeptic as much as Taleb, one could easily claim that we often misunderstand phenome…

When investing in something like the FAANG index or Google you're not betting on how the companies will do. Predictions like "Google is going to do well in the future and continue to grow" are not useful for making investments.

You're making a bet that Google will do better than everyone else thinks it will. And even more than that. You're betting that it will do so by a wider margin and/or with a higher likelihood than the available alternative investments you could make with that same money.

And even more than that, you're betting that Google will do better than everyone thinks it will and that the market will acknowledge this the way that you expect and the price will adjust accordingly in a time frame that is relevant for your investment goals and solvency.

Re: Are random trading strategies more successful than technical ones?

#30

Post by gruez »

cschmidt wrote: post #6

This reminds me a bit of a classic paper called "1/N". It compared a portfolio of putting equal money into each security, vs a bunch of fancier approaches. The 1/N almost always won. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=911512

> It compared a portfolio of putting equal money into each security, vs a bunch of fancier approaches

They compared equal weighting, but did they also check market-cap weighting?

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