Randomness and E-Mini Trading

By David Adams

Among the most controversial topics in market theory is the degree and level of randomness present in each daily trading session. There are those that deny the random movement of the market, while others believe that all market movement may be random. The truth probably lies somewhere between these two extreme views.

The human mind has a very difficult time dealing with random events. We are genetically programmed to sort and organize events into patterns that are identifiable. Yet randomness in the market is poorly understood, and competing theories have muddied the waters of true comprehension. In my opinion, there is a high degree of randomness in the market; along with some highly organized behavior that also occurs in the market. With a plethora of studies published in recent years on this topic is difficult to come to a definitive conclusion as to which portion of the e-mini market is random and which portions of the market are finite trends. Let’s face it, any experienced trader has observed the market rocket in one direction without rhyme or reason and found himself scratching his head in confusion.

And it’s that confusion in the e-mini markets that causes so many individual e-mini traders to misinterpret market movement and true trending patterns. From my reading, it is my opinion that about 65% of market movement is random in nature, and about 35% of the market movement is organized behavior. This is a difficult concept, as I have mentioned earlier in this article, for most investors to accept. Things happen for a reason, and we are conditioned to interpret most actions in terms of cause and effect. The market defies these traditional notions and a great deal of testing has shown that at times the market moves in a highly random manner.

So how does that affect us as e-mini traders?

From my viewpoint, I think it is important to identify the trending markets and specifically concentrate on trading the market during the periods that it trends. As I have mentioned, this limits most traders who choose to follow this maxim to trading only about one third of the daily trading session. The rest of the time you may find yourself watching the market ping-pong back and forth in a tight range. Generally speaking, range bound trading is a function of normal market operations of filling and backfilling. I specifically avoid any activity in the markets during these range bound periods or during periods the market forms a channel. This channel behavior is generally called a consolidation period.

If you believe the tenants of my belief, it is not difficult to understand how individuals who engage in over-trading often find themselves on the negative side of their futures account. There are only so many times that the market trends sufficiently to initiate trades that stand a chance of earning a respectable profit. On the other hand, channel trading is typified by false breakouts and false breakdowns, which are frustrating and generally result in a losing trade.

In summary, it is difficult to ignore the vast amount of literature that empirically illustrates the random nature of e-mini markets. On the other hand, there is a good deal of evidence that suggests that the market is not entirely random, and periods of trending are not random behavior but organized movement in the market system. For e-mini traders then, the logical conclusion is to focus your trading efforts on those periods when the market is in a trending pattern and avoiding those periods of time when the market is displaying random behavior caused by normal filling and backfilling from the retail sector.

About the Author

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