The inter-connection
The exchange is a place that connects everything to everything. In effect it connects you to everything and everything to you. That's not one or two things but several hundreds and thousands of events everyday. Each of these events can impact you positively or negatively. Each of these events can impact you significantly or insignificantly. The events are neither independent nor one off. They have complex inter-connections and have a history behind them. It is important for you to see this connection, to see what is happening around the world and understand what will be its impact. Only then will the insane price tickers on the stock exchange start making any sense to you.
Random or real?
There is a reason behind everything. Nothing is random. But as the number of variables impacting something becomes large, things start to look random because you lose track of the variables and then the equation in your mind becomes incomplete and what cannot be defined by an equation looks random. There are complex theories people use to identify patterns out of randomness like fractals, elliot, fibonacci. These complex patterns are often seen in nature because every event in nature is also a function of large number of variables and hence very complex. But nature has a pattern, we don't see nature as random, right? Something very similar happens in stock markets too.
Beauty of randomness
Something that cannot be defined in absolute terms, cannot be reproduced or mass manufactured but has a pattern to it remains perpetually beautiful because it is unique. That is why nature is beautiful. There are millions of roses but each rose is unique and yet they all follow a pattern. However a teddy bear produced in a factory might look and feel good once or twice but after that it is boring and useless especially when you see hundreds of them racked together in a shopping mall. Similarly stock market is beautiful because everyday in the stock market is unique and every tick in the stock market is unique. There is a pattern but there is no absolute equation that can define the stock market behavior.
Pattern vs points
So how can we use this understanding of pattern and randomness in stock market? For one thing many people waste lot of time trying to accurately predict price points like this stock will hit a target of 32.56 in three days. It is the biggest waste of time and foolishness of the highest degree because like I said above every tick in the stock market is unique and hence cannot be predicted. If you could predict a single price point in the stock market, you can easily become a millionaire by betting all-in on that point however it never works like that. What you can do at best is "understand" the pattern and align yourself with the pattern. It is not intuitive at first because when you think about stock exchange the first thing that comes to your mind is a ticker of red and green numbers and to say that these numbers are meaningless and unpredictable is counter-intuitive. Most of the truth in the world is not what it seems, it is hidden in layers below the visible surface and stock market being as complex as life itself also has similar characteristics.
Lessons so far:
Is stock market random - No
Is stock price predictable - No
Does stock market have a pattern - Yes
Can I predict the pattern - No
Then what the heck? You can just align yourself with the pattern and enjoy its beauty
How to study patterns?
Patterns can be very simple like continuously rising stock price or continuously falling stock price. Patterns will differ based on the time window you look at. If you use large time windows the patterns are clearer and easier to understand and align with. If you use small time windows the patterns will look erratic, volatile and random or just noise. Try this by refreshing the quote page of a stock every few seconds while the market is open and try to predict the next quote. It is absolutely bizarre. Now try to look at a one year chart and possibly you will see a pattern like rising or falling or range bound. Then try to look at 1 year charts of several stocks and again all the charts would seem random. Here feeling of randomness is due to the lack of knowledge about the events that impacted the stock you are watching. So take one particular stock and start reading about its 1 year history and start mapping the major events to the price movement in the chart and you will start seeing some kind of method to the pattern. Look for dramatic changes or reversals or accelerations in the pattern or trend and try to find reasons behind it and the chart behavior will start becoming clearer to you.
If I had all the time in the world to do this :)
Yes, we don't. Even if we were doing this full time still we cannot analyze things in such detail and keep track off so many things. But the point of this one time exercise is to get your understanding about the stock market right and not to drown yourself in the events of the world. If you understand the stock market as random you will try to take random bets and end up with random often disastrous results. If you understand that there is a pattern, a method to the stock price movement, you will be able to take much more intelligent and accurate decisions and you will be much more comfortable with the fluctuations you see in the market based of how and how much you understand it. You will be able to separate pattern from the noise. So the point of this blog is to understand how not to get fooled by randomness but to understand the patterns that look random.
More about patterns?
Well as far as patterns are concerned, I will have to write a book instead of a blog. Especially the relatively complex ones like elliot, fibonacci and fractals are much more interesting and useful than the simplistic "head and shoulder" and "cup and handle" one's. I have my own techniques which literally enables me to have long and interesting conversations with the stock and market charts ...but that is for some another day, another time, another blog .. till then don't be fooled by randomness because nothing is random !
The exchange is a place that connects everything to everything. In effect it connects you to everything and everything to you. That's not one or two things but several hundreds and thousands of events everyday. Each of these events can impact you positively or negatively. Each of these events can impact you significantly or insignificantly. The events are neither independent nor one off. They have complex inter-connections and have a history behind them. It is important for you to see this connection, to see what is happening around the world and understand what will be its impact. Only then will the insane price tickers on the stock exchange start making any sense to you.
Random or real?
There is a reason behind everything. Nothing is random. But as the number of variables impacting something becomes large, things start to look random because you lose track of the variables and then the equation in your mind becomes incomplete and what cannot be defined by an equation looks random. There are complex theories people use to identify patterns out of randomness like fractals, elliot, fibonacci. These complex patterns are often seen in nature because every event in nature is also a function of large number of variables and hence very complex. But nature has a pattern, we don't see nature as random, right? Something very similar happens in stock markets too.
Beauty of randomness
Something that cannot be defined in absolute terms, cannot be reproduced or mass manufactured but has a pattern to it remains perpetually beautiful because it is unique. That is why nature is beautiful. There are millions of roses but each rose is unique and yet they all follow a pattern. However a teddy bear produced in a factory might look and feel good once or twice but after that it is boring and useless especially when you see hundreds of them racked together in a shopping mall. Similarly stock market is beautiful because everyday in the stock market is unique and every tick in the stock market is unique. There is a pattern but there is no absolute equation that can define the stock market behavior.
Pattern vs points
So how can we use this understanding of pattern and randomness in stock market? For one thing many people waste lot of time trying to accurately predict price points like this stock will hit a target of 32.56 in three days. It is the biggest waste of time and foolishness of the highest degree because like I said above every tick in the stock market is unique and hence cannot be predicted. If you could predict a single price point in the stock market, you can easily become a millionaire by betting all-in on that point however it never works like that. What you can do at best is "understand" the pattern and align yourself with the pattern. It is not intuitive at first because when you think about stock exchange the first thing that comes to your mind is a ticker of red and green numbers and to say that these numbers are meaningless and unpredictable is counter-intuitive. Most of the truth in the world is not what it seems, it is hidden in layers below the visible surface and stock market being as complex as life itself also has similar characteristics.
Lessons so far:
Is stock market random - No
Is stock price predictable - No
Does stock market have a pattern - Yes
Can I predict the pattern - No
Then what the heck? You can just align yourself with the pattern and enjoy its beauty
How to study patterns?
Patterns can be very simple like continuously rising stock price or continuously falling stock price. Patterns will differ based on the time window you look at. If you use large time windows the patterns are clearer and easier to understand and align with. If you use small time windows the patterns will look erratic, volatile and random or just noise. Try this by refreshing the quote page of a stock every few seconds while the market is open and try to predict the next quote. It is absolutely bizarre. Now try to look at a one year chart and possibly you will see a pattern like rising or falling or range bound. Then try to look at 1 year charts of several stocks and again all the charts would seem random. Here feeling of randomness is due to the lack of knowledge about the events that impacted the stock you are watching. So take one particular stock and start reading about its 1 year history and start mapping the major events to the price movement in the chart and you will start seeing some kind of method to the pattern. Look for dramatic changes or reversals or accelerations in the pattern or trend and try to find reasons behind it and the chart behavior will start becoming clearer to you.
If I had all the time in the world to do this :)
Yes, we don't. Even if we were doing this full time still we cannot analyze things in such detail and keep track off so many things. But the point of this one time exercise is to get your understanding about the stock market right and not to drown yourself in the events of the world. If you understand the stock market as random you will try to take random bets and end up with random often disastrous results. If you understand that there is a pattern, a method to the stock price movement, you will be able to take much more intelligent and accurate decisions and you will be much more comfortable with the fluctuations you see in the market based of how and how much you understand it. You will be able to separate pattern from the noise. So the point of this blog is to understand how not to get fooled by randomness but to understand the patterns that look random.
More about patterns?
Well as far as patterns are concerned, I will have to write a book instead of a blog. Especially the relatively complex ones like elliot, fibonacci and fractals are much more interesting and useful than the simplistic "head and shoulder" and "cup and handle" one's. I have my own techniques which literally enables me to have long and interesting conversations with the stock and market charts ...but that is for some another day, another time, another blog .. till then don't be fooled by randomness because nothing is random !
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