| Here's is where we start to have some
| |
| | seemed to follow a random walk as he
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| fun. Regardless of how you want to trade
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| | observed them.
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| the markets you need an approach. It
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| | The best way to demonstrate this is with
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| might be spinning a bottle, asking your
| |
| | a game. Let say we are going to make a
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| Aunt Jenny what she thinks or just gut
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| | bet on the toss of a coin. You start
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| feel.
| |
| | with $100. We will toss this coin once
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| However you do it, even though you may
| |
| | per day. If it comes up heads you win 3%
|
| not think so, you have an approach.
| |
| | and if it comes up tails you lose 2.5%.
|
| The majority of traders will eventually
| |
| | At the end of the first day you will
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| use some form of technical analysis (also
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| | either have $103 or $97.50. At the end of
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| known as chart traders, market
| |
| | the second day we repeat the process.
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| technicians and chartists).
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| | The probability of the coin landing heads
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| Just before we go down this road of
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| | or tails is exactly 50%. This is because
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| mystical wonder I think it is very
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| | regardless of how many times the coin is
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| important that you hear both side of the
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| | tossed each event is independent. The
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| argument of why technical analysis works.
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| | coin has no memory of what happened the
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| For every book that there is on making
| |
| | toss before. This means that the results
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| money trading there is probably an
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| | will be totally random.
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| opposite book explaining why it can't be
| |
| | Kendall's paper implies the same effect
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| done. Before you dismiss the last
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| | in the stock or commodities market. If
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| statement out of hand. Lets explore the
| |
| | each day is an independent event then the
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| argument that no matter what you do you
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| | markets must be random. We shall talk
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| can't beat the market.
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| | about more probability's later.
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| Random Walk
| |
| | Taking this idea slightly farther if the
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| The random walk theory dictates that a
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| | markets are random then the history of
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| security prices changes randomly, with no
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| | the price of a stock or commodity has no
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| predictable patterns. Now that's quite a
| |
| | bearing on the future price. It wouldn't
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| statement but there are number of very
| |
| | help to look at charts or data, as each
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| respected statisticians who have a very
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| | day there would be a 50% chance of the
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| convincing argument to prove it.
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| | market going up or down.
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| It all started in London with a man
| |
| | You may be thinking by this stage that
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| called Maurice Kendall who presented a
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| | this theory is rubbish. I can trade the
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| paper to the Royal Statistical Society in
| |
| | markets and make money! Try this simple
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| 1953. The subject of the paper Kendall
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| | test. Have a look at the two charts
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| presented was the behavior of stock and
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| | below. One is a chart of 100 daily closes
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| commodity prices.
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| | of the Dow Jones Industrial Average and
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| Kendall started out looking for
| |
| | the other is a 100 random coin tosses.
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| predictable price cycles in stock and
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| | Makes you think doesn't it! If each day
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| commodities prices. The problem was he
| |
| | in the market were in fact an independent
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| couldn't find any.
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| | event then it would be impossible for you
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| Regardless of how he approached it, the
| |
| | to make money from it consistently.
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| price of a stock was just as likely to go
| |
| | You see any succession of event's
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| up or down on any given day despite what
| |
| | particularly independent events can have
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| happened on the previous day. Which is
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| | an aberrant run. This is what kills the
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| where we get the term Random Walk. Prices
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| | trader.
|
