Is the financial markets random walk really random?

Well, how would you orientate yourself in the space without the use of a map? What is crucial on a map to know where you are going? Simple: (1) a scale and (2) landmarks. Well when you start analyzing financial data, you can picture yourself as in the middle of nowhere and you are trying to go where you will achieve a financial objective to either generate alpha or beta. This sounds a little bit theoretical but it is really what you are trying to achieve.
So how to find the right scale, the measure unit? Well on a true map, this is the small ruler that makes one km in real life corresponds to x cm on your map. This is a constant ratio. However, observing financial markets make you think of chaos. So why should this measure be stable overtime? Remember that risks are embedded in markets and it has to be reflected somewhere in your approach. This is for example what the Bollinger bands are about.
Some example of measures could be realized volatility, implied volatility, high — low or some function of this difference … Having said that, over which horizon should the scale be defined? Once again, no easy answer knowing in any case that short term autocorrelation is strong in financial series.
And the landmarks? Are they that fixed? Well of course they are not !!! They cannot be. They move along with the markets. If you are pursuing a trend following strategy, you could take some moving average as your fixed points. Depending on how where the markets are positioned vs these landmarks, your strategy will tell you to go into one given direction or to stay where you are.
Once you have defined your scale and your landmarks you can start progressing in the various direction ie take either long or short positions or do nothing. Let’s start the investment game !!! But hold on, how much should you bet for any of your trades? Well, we will cover this topic later on. Stay tuned.
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