Here are some market relevant quotes from Bringing Down the House: How Six Students Took Vegas for Millions (by Ben Mezric), a well written story of how a group of students devised a system to beat the Vegas casinos:
– Overall, the team was still way up on the month. But it was a painful lesson to learn all at once. No matter the count, the cards could go bad. Over time, winning was inevitable, a matter of pure math. But in the short run, the game could go either way. Even math left room for luck.
The joy with this type of system is that practice makes perfect. Once you have a strong sense of the statistical probabilities involved you can manage your money accordingly, fully aware of the risks involved. Chance becomes quantified. The financial market is also a casino of sorts but it evolves and it is much more difficult to be anywhere near as certain of the probabilities of success. We do try but our world is filled with inherently unquantifiable uncertainty.
– He remembered what Micky had said when they kicked him off the team: The most important decision a card counter ever has to make is the decision to walk away.
– Blackjack is the only game in the casino that is beatable over an extended period of time, because blackjack is subject to continuous probability. This simply means that what you see affects what you are going to see. Blackjack is a game with a memory. If an ace comes out in the first round of blackjack shoe, that means there is one less ace left in the rest of the deck…in other words, the past has an affect on the future.
The financial markets may not have the same type of continuous probability memory found in blackjack, but most participants who are trying to beat the market must believe the market has a memory of some form or another. Technicians for example, explicitly believe that historical price behaviour influences future prices. Fundamental analysts also share this belief of market memory, though the channels in fundamental analysis are less direct (i.e. past financial prices and economic variables are used to help form an outlook for the future). Personally, I believe I see occasional evidence of memory in the foreign exchange market that suggests the market is not entirely random.
PS – Mezric also adapted his story for Wired magazine, which is worthy of a quick read if you haven’t read the book.