Random Walk Theory has got to be the ultimate dinner party firecracker if you’re hosting a bunch of Traders to Tea. It’s guaranteed to divide the room as much as a political debate and provide a buffet of theories. And for good reason. Is the Market Random or is it …………somehow Not Random?
Given that every trading strategy inherently seeks to exploit calculated probabilities, the idea of repeatability in the markets is a centrepiece like no other ie Probabilities are only probable because they are prone to repeat. The forensic work is about hunting THE conditions which make this logic fertile.
Hence, exploring Signatures and recurring geometric phenomena in the market has been my longest Fascination Quest as a trader. I may have had a head start – my “eye” was always good at catching what looked like repeating gradients in the charts even before I knew anything about Gann’s work or Fibonacci. The ocular equivalent of being blessed to hear a certain pitch on the airwaves I guess.
But like some blessings, it was also a curse – It used to both excite and frustrate me because I would see patterns of re-occurrence in the market all the time. But then have no idea how to galvanize it into something outside a “gollygoshgeewhizz” moment in backtesting.
Like most traders, I went through those dismal years of trying to become profitable using lagging indicators and dog-shit trading strategies bought on-line. One day I just stopped. Stopped trying. Threw it all out the window. And just sat and watched the screen like a snake studying its prey. I did that for close to a year. No pre-conceptions. Just an outlook committed to observing.
Breaking pre-conceptions can be a big moment of breakthrough. When you do this, you somehow enter what I’ve come to know as a whole-brain state. It’s like you inherit another half a brain to thrash out your problems with.
Anyway, it was in this state I began to see and then UNLEARN the things restricting a fuller understanding. Although, that being said, I generously thank the words and teachings of Traders such as Australian based Cameron Mitchell (Geometry of the Stock Market), Perth Based Trader & Mathematician Bill Wormald (Trends and Tripwires), Alan Oliver (Trading with Gann) and NY based Michael Jenkins (Stock Cycles Forecast/Secret Angle) for their respective articulations about repeating “signatures” and recurring patterns if the market is viewed in a geometric framework.
Their works have been very influential and helped drive me into my own agendas about Signatures in the market. My entire Signature Series of Custom Add-Ons are a cache of practical tools dedicated to this agenda.
But like all good teachers, they didn’t hand me (or any of their other students) the answers. Cameron Mitchell was the fiercest of my teaching mentors but also the most entertaining……..He had a lovely habit of over accentuating numbers and concepts he wanted your feeble brain to retain. Riddles to solve mostly. But simultaneously instructed students to never write and ask a question unless you demonstrated how you’d attempted to answer it yourself!!! Self sufficiency – I get it. Each of these teachers however were successful in coaxing their students into the potent ideas. A wise move. No one ever values anything that is handed to them easily.
Whilst these days I predominantly trade FX, I’ve come to realize that the ultimate currency is actually BELIEF. And belief only comes from first-hand experience. It’s not a module you “get” just coz you handed over your money for the course or the strategy you just bought.
So if you’re a trader and haven’t yet had the Random Walk Theory chat with yourself, here’s an interesting exercise to put yourself through. You’ll gain your own personal conclusion by the end of it I’m sure. (By the way this is a particularly good exercise if you’re in a trading rut and are feeling overwhelmed with the market and want to simplify your core understanding.)
Consult the diary of Economic Announcements such as you’ll find on Forex Factory’s calendar – https://www.forexfactory.com/calendar
Find a Code Red announcement and make a date to be in front of your charts at that time. I can strongly recommend NonFarm Payrolls coming out the US.
Load yourself a Range Bar Chart set to 3 or 4 Range Value. (Range charts are an interesting way to look at order flow in the market as they are tick based charts with the TIME factor absent from their calculation. To that end, they are right proper indications of volume. When price is moving, you get lots of information and when price is not moving, you get less information print to the chart.) If your charting platform doesn’t have Range Charts, take a look at the NinjaTrader Platform. You can get started for nix and even buy 15 minute delayed data for a month for less than the price of a cappuccino while you explore the platform and hone your trading.
Next, watch the spray of chart activity at news release time.
In faster time than a human being could press a button to process that amount of volume, ask yourself do you now see Chaos or Order in the outcome?
I’d love to give you the answer but that will spoil it. So that’s where I’ll sign off.
Disclaimer – This post is intended for information and entertainment purposes only. It should not be regarded as financial advice, recommendation, or solicitation of any product, service or trading strategy.