Trend Sigma
  trade the Big Run & smile  

Random Walk?

Are stocks moving randomly or are they producing trends and other formations that can be spotted in a chart and in turn exploited in the stock market? A quick glance at almost any stock chart gives so many the impression that there are clearly patterns, regularity that should make trading possible.

Interestingly this observation is at least incomplete and misleading:

  • Many parts of a chart that look like meaningful formations are in reality random.
  • Many trends that seem to have an underlying force are in reality random.
  • There are phases of random-like behavior and phases of movements with coherence in time. Trends and other patterns that deviate from random alternate with random that only may look regular.
  • Profitable trading is possible even in a random market.
  • Really profitable trading is possible during phases of time coherence if you are able to distinguish them from the random phases.

The conclusion of the above is that there are two very different ways to profit in the markets. Making a "Trend Walk" is the direct one and exploiting the "Random Walk" the other.

Darvas and Livermore merged into one "investo-trade" system is for people trying to shoot for the maximum by directly squeezing trends. The system also allows operation with only a modest amount of work.

If you are searching for a system that makes consistently money independent of market directions and works even in a bear market, a system with option strategies may be for you. That would include knowledge about hedging with stocks and options done right by getting favorable entry prices. In that case the market can do what it wants to do - you are fine if it does its random walk. Still, there are large obstacles to overcome in the options market.

Forex   Under the millstones of the banks
Futures  Hoping for the trend and finding chaos
Options   Above average? You will still lose!
Stocks   The negative-sum game for investors

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