Market randomness

Every tick, every pip and every move has it’s movers behind. We all know that. Supply and demand is meeting and creating imbalances in markets and affecting the rate of the particular financial vehicle. As technician I like my charts but I know by hard failure how easy it is to fell in love with nice H&S pattern or a strong S/R breakout. As a technican I have to be aware that not all actions are created with specific meaning {although financial news agencies are trying to convince us otherwise}. Let’s say we trade EURUSD pair and price set a new support at 3615. This stop doesn’t necessarily means that the market doesn’t like this specific level and is not willing to go below. This can simply mean that the ratio between sellers and buyers is different at that specific moment yet we sometimes create a support level out of this 3615 even when it doesn’t have any psychological meaning to the big money which are moving the market.

As an example I created this very simple experiment in excel to show you how random markets can be {excel file can be found at the end of the post}. I took 20 000 numbers and assigned them random function. This function then generated three possible values: 1; 0; -1. Every time the random value is generated it is added to the previous number. For 10 numbers it might look like this:

I have generated the “random” set about 100 times and every single time guess what I saw? I saw trendlines, supports and resistances, market patterns and I believe that if I would generate random values for candlesticks I would see hammers/engulfings and shooting stars. Check it for yourself and let me know what you see in this random set:

And what is the purpose of this experiment which can be eye opening for some? It is simply that markets do not necessarily create pauses and S/R for some psychological reasons and that we have to take some sort of randomness into account. See for yourself in the excel file. I bet you will be able to find plenty of interesting setups in randomly generated sets.

So next time you think you have an edge, think twice. Maybe the market is just fooling you into some random trap.

Just a thought.

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PS: If you are willing to accept this post as a fact please carry on reading Adam’s blog post series about randomness