Blog Flux LinkLog: Outgoing Link Logging and Tracking for DAYTRADING FDAX FUTURE DAYTRADING FDAX FUTURE DOW JONES BLOG

Thursday, May 18, 2006

A REVEARSAL CHART PATTERN

Markets clearly topping off the last days,as expecting in my post 'The end of Trends' , almost totally correct the rise of this year. You can see this in the chart of the S&P500 , the Dow Jones and the German FDAX.


Chart patterns can be very usefull, but are not easily recognised immediatelly. It is allways easy to see a top revearsal afterwards as shown in a post of Stepan Vita. He describes a classical top pattern in the chart of Toll Brothers (TOL). You can see a Shoulder, Head Shoulder (HSH) pattern and also a black cross. Now this is recognised at the moment when most of the correction of last years bullish trend has been done, but off course difficult to predict in an earlier stage, eg after the HSH patten occured.


Tuesday, May 16, 2006

RANDOM WALK, GAMBLING AND TRADING

Physical problems are sometimes modelled as random walks, sometimes also called a "drunkard's walk". In this model many successive steps are taken, but each in a random direction. The direction of each step being independant of the direction of the previous one.


A famous example is the Brownian motion of a smoke particle in very dilute gas. The invisible gasmolecules colliding at random against the, in comparison to the molecules, very big smoke particle. In two dimensions a random walk can be seen in the figure below.



Random walk of 1000 steps


Random walks have serious implications for probabilty events. When throwing a fair coin, you know the chance of a head equals the chance of a tail (50:50 or p= 1/2). But what are possible outcomes when throwing a fair coin? Suppose the coin did come with a streak of 6 tails in a row? What is the chance of the next throw also being a tail? The chance of another tail is just 1/2 independant of the foregoing outcome.


Many people intuitively assume that after a series of consequtive tails a head must show up with greater certainty. There are many examples of this assumption of what is called the expectation a regression to the mean.


Last night I watched on television a pokergame (Texas Hold'em at the Poker Den organised by PartyPoker.com). There was this beautifull young lady getting bad cards al night and the commentators just outbursted that it is not possible to get bad cards forever, she had to get good cards at last: she played out without getting a picture and only a few hands played.


The man in the casino watching slot machines which didnot pay out for a long time is also an example of an expection for a regression to the mean. Casino's know this too well and just let the slot machines produce random numbers so the next outcome is independant of the previous one: a losing game by all means, the edge is to the house, the chance of a win is smaller than 1/2.


But let's return to a coin. I found an astonishing picture in A Guide To Gambling, Love, The Stock Market & And About Everything Else, a book I noted before.

The graph shows the result of a computer-simulated sequence of thousend thosses of a fair coin, eacch time a head is coming up it adds up +1 and when a tail comes up-1. You feel since the probability of each result, tail or head, is equal, here should be as may heads as tails after a certain time.


Now this is true but only after a very long time, in fact after infinite time. Over the short term, which may relatively long periods, more heads than tails occur and vice versa. This supposes very long lasted unexpected streaks of either tails or heads. This is the random walk of a coin.


There is a formula for the probability of a streak:

  • q = [1+(n-r) p]q' (1)

  • n = amount of tosses (trades!)

  • r = losing streak

  • p = chance of a single outcome

  • q' = P^r (power r)


For an explanation and an example see winning and losing streaks.



We return to our activities on the stockmarket. Market prices are sometimes also considered as random walks (especially as the outcome a of classical price theories). In a way we could see in graph above the movement of a stock price (or future or whatever) in time.


In an earlier posting I gave a distribution of one day and 5 days returns on the GBP/USD. Clearly these distributions are not random: it resembles more of a normal distribution around a mean. Whatever it is, the movements in a much smaller timeframe, eg ticks, could still be a random walk. Maybe the duration in which the one day and 5 day returns are gathered is just to small to reject a random walk.


In approximation the distance R² from a starting point in a random walk to the end point is proportional to N in which N is total of steps:


R² = N*r
(2)


r is the square root of the average squared step size or root mean squared step size. If I take r as a tick on the FDAX and normalise to 1 formula (2)becomes:
R² = N.


and R is epresssed in ticks.
(followed)



Sunday, May 14, 2006

THE END OF TRENDS?

Trends do end in any given timeframe. We saw on the last two days what maybe an end of this years strong bull trend, although it may not be over yet.


I was thinking of this when reading Paolo Pezzutti's posting what Mr. Buffet warnes about speculation and and the investments of the public. I cite his posting:


"The price of metals, such as copper, and other commodities like oil, initially climbed on fundamentals, but the gains have now attracted more investors betting on further price gains, he explained. “What the wise man does at the beginning the fool does at the end,” he quipped. “Once a price history develops enough for other people to see it and get envious, that takes over markets. We’re seeing that some areas of the commodity markets.” "


"Selling in may and go away" be the right thing to now. The DOW still in it's trend but the broader markets aren't. See charts below, click for a full screen.