Are the markets random?

Randonmess in the markets is something the majority of traders overlook.

A lot of people who start doing this end up in the day trading community, trying to become one of those “successful” day traders someday who are capable of winning 7 out of 10 times. But the majority will fail. And the reality is that the markets are random when looked from a day trading perspective.

Day trading random

If we take our sight away from day trading and direct it to the long term looking at daily, weekly and monthly charts we will clearly see that there are markets that go up more than others. And those movements are not “random”, because they are based on fundamental (and sometimes irrational) reasons. That is why randomness is very important for those who want to do day trading.

It is the randomness in day trading that make brokers very happy to have myriads of new day traders every day. The “bid ask” will take care of it.

Day trading and games

There is a very good article done by SMB mentors about market randomness and the games. They explain the famous experiment that consist in throwing a coin 1 million times and see what the results are.

Logically, the result should be approximately 50% of times for each side. And the result was almost that in different occasions: 50.03 %, 50.01 %, 49.99 %, 50.05 % and 49.98%.

In the fourth case the result was 500500 one side and 499500 the other side. So if we make 1 million bets of 1 € we would have won 1000 € betting for the first side.

But, we should see this cautiously.

It seems quite a lot of money, but it is not because if we do 1 million trades you can be sure that the transaction costs will be much more than those 1000 €.

Day trading casino

You know the casino has to make a living.

And also there is the fact that 1000/1000000 is approximately 0.1 % of the amount. Not a significant amount.

The most interesting part is when we look at the charts.

If we look at them objectively they could be some stock or asset. There are trends, bottoms, tops, supports, resistance.

So if we accept that flipping a coin is a random event, and it looks like a stock on a chart, should we claim that financial markets are random?

Well, games like flipping a coin do not give an “edge” to any player. After one million bets both players will have similar results, and 0,2 % of overall profit after 1 million bets does not seem to be a good return, not to mention if we add expenses.

The interesting thing for a trader consists in being right 600 thousand times and wrong 400 thousand times.

Day trading illusion charts

So, the problem to look at a chart like the one the guys at SMBU provided, is the fact that to see it more correctly we should consider than the X/Y axis is a bit misleading; since we cannot compare 1 million € or $ shots (X) with 1 thousand $ profit (Y).

The X axis should be so big that when we looked at it, the chart would seem flat. That is what a 0.2% return looks like after one million bets: almost flat.

Another thing is when we compare a chart with 200000 (Y) of profit with 1 million bets (X). There we could identify a trend. Just try to draw in your head the same chart with a 200 thousand profit as the axis Y.

You would need thousands of screens on top of each other for that.

What I mean is: a trader should not be interested in assets that move in a flat way. That is why a professional gambler will not be flipping coins (except if he is the House).

Traders looking for trends

Traders are not interested in assets that have had a trend of 10% after ten years.

Traders are interested in assets that rise 600% in 10 years, or 40% in one year.

That is the kind of “edge” a trader has to look for. Those are the kind of not “random” assets we should search for. That is why I find incredible when I see so many people trading assets like the Pound Dollar cross in years like 2012 or 2013. Well, to tell the truth a lot of them try to do so by day trading. So they do not know what the long term trend of the market is, and if they do they do not care. They think they can flip 1 million bets day trading the cable and make a killing every week.

The only one that will be making a killing every week is the broker, just as Goldman Sachs is.

Day trading randomness

Day trading has an indisputable problem.

By its essence day trading implies that the trader will be trading every day. People believe that with some indicators and automated trading they can beat the market and earn a “salary” every day or month.

The fact that this successful pattern is promoted by the industry makes matters worse sending countless new traders every day to the arena of the circus.

They are eaten by the lions of course.

Markets randomness

It is true that no market goes up in a straight line in a bull market, and there are secondary countertrend moves. But that is not the way a trader should look at the markets.

The right way is to look with a medium and long term perspective.

Look for the trend.

It is not rare at a lot of that day traders short a huge bull market that lasts months, just because their day “signals” tell them that that day they have to short.

While a trend trader gets one or two signals in a 30% bullish move of two months, a day trader may get 100 signals and trades during that period. Some bull, some short.

I am not saying that you cannot win doing day trading. Maybe if day traders look for help in the daily charts, and only trade those assets that are in a clear bull or bear market, they may have a chance. But I think that it would still be very difficult for them, for even if you catch the bull trend the transaction costs are too big that you will give up most of the profits eventually.

That is the problem of day trading; mainly a problem of trading costs.

Market makers and Brokers are obviously the successful “day traders”.

Markets are not random

Markets are the result of millions of human interactions, and there is a very strong mass psychological component, and that is the key that makes the markets not random. That is; there are good reasons for a bull market, and there are good reasons for a big correction and a bear market. That fact is that human politics and society tend to behave in a similar and more or less predicted way. So a true speculator (a professional gambler) only has to identify when a trend is developing, bet for it and sit tight.

For instance, the Venezuelan bolivar is a currency that is going straight to hell and has since many years ago. So the fact that it is going to a zero is not random. There are fundamental reasons for that.

Every Venezuelan citizen (good traders) that left his country did so to escape from a never-ending bear market. A bear market for their society as a whole. Actually the Venezuelan stock market is soaring these years.

John Keynes randomness

Keynes was right when he said that in the long term we are all dead. In that respect, yes, the markets are random.

They did not exist ten thousand years ago, and they will surely quote 0 someday in the future, but that does not mean that the markets are random in the medium term.

There was a good reason for the Zimbabwe dollar to go hell, and there was good reason for Google to go from 50 to 500 $.

When the overall market is trading at a 50 PE ratio, it is only a matter of time that there will be a great correction.

It is mass behavior that makes markets not random.

When there is a bubble, there is a bubble, and it has nothing to do with flipping coins.

Flipping coins and Market moves

Lottery, binary options, day trading, and things like that are more similar to flipping a coin, but with a huge problem: transaction costs. So after 1000 moves, the capital is gone.

A speculator knows that when a communist regime is about to come, then randomness, or corruption will be the norm.

As long as there is a private economy and some liberty, there will be not a complete random behavior.

The laws of quantity and randomness

But this does not mean that human society has not a, more or less, defined pattern. And that pattern is a cyclical very long term move from quality to quantity: a move that will end with a sort of totalitarian world dictatorship.

From that point of view, traders are some of the last men of action. For when a totalitarian regime is in charge: randomness will be the norm, along with unlimited corruption.

Quantity leads to socialism, and socialism leads to randomness.

Good luck.