Sunday, August 23, 2009
TA as science
In order for TA to be accepted as a valid scientific discipline, its methodology must be validated via the scientific method. This does not mean that in the absence of such validation the discipline cannot be used or investigated, it just means that until that happens the discipline will be subject to legitimate criticism as a pseudo-science.
In order for a particular technical pattern to be valid, it must be shown via the scientific method to work better than a random signal. In order for that to happen, the method must:
1) Be rigorously defined so that its application is uniform and repeatable;
2) Be demonstrated to work consistently better than a random signal, prospectively, without hindsight bias, in an experimental fashion that is repeatable by other practitioners.
It is in the attainment of these two objectives that the discipline of subjective TA is lacking.
In order for a particular technical pattern to be valid, it must be shown via the scientific method to work better than a random signal. In order for that to happen, the method must:
1) Be rigorously defined so that its application is uniform and repeatable;
2) Be demonstrated to work consistently better than a random signal, prospectively, without hindsight bias, in an experimental fashion that is repeatable by other practitioners.
It is in the attainment of these two objectives that the discipline of subjective TA is lacking.
Arcs and lines
If one draws enough arcs, lines, fans, and channels on a given chart, one is bound to find things that the mind interprets subjectively as significant.
This is because the human mind is strongly disposed by evolutionary forces to see pattern and structure in everything in nature, even where it does not exist. This is why disciplines such as palmistry and astrology thrive even in the modern world. Traders and technicians like to think of themselves as grounded in science and evidence-based practice; in reality, much of the discipline of subjective technical analysis bears more of a resemblance to alchemy or astrology.
Subjective TA lives on because it always appears to "work" in retrospect. Those lines appear to have meant something significant looking back. But subjective TA lacks prospective power. It does little to inform about where the market will be tomorrow, or one month, or one year from now. And from an in-the-trenches trading perspective, that is all that matters....
This is because the human mind is strongly disposed by evolutionary forces to see pattern and structure in everything in nature, even where it does not exist. This is why disciplines such as palmistry and astrology thrive even in the modern world. Traders and technicians like to think of themselves as grounded in science and evidence-based practice; in reality, much of the discipline of subjective technical analysis bears more of a resemblance to alchemy or astrology.
Subjective TA lives on because it always appears to "work" in retrospect. Those lines appear to have meant something significant looking back. But subjective TA lacks prospective power. It does little to inform about where the market will be tomorrow, or one month, or one year from now. And from an in-the-trenches trading perspective, that is all that matters....
Thursday, August 20, 2009
Correlation
The high correlation of diverse assets is, of course, characteristic of deflationary recessions. We are not used to such high correlation, since deflations are relatively rare in comparison to other types of cycles.
It is easy to forget that the current cyclical bear market started as a credit crisis; and credit crises are by their very natures deflationary.
Unlike the 1930s, this time the Fed threw all the ammunition it had at the deflationary monster; the behavior of gold recently suggests that he's still alive and may have some life left.
It is easy to forget that the current cyclical bear market started as a credit crisis; and credit crises are by their very natures deflationary.
Unlike the 1930s, this time the Fed threw all the ammunition it had at the deflationary monster; the behavior of gold recently suggests that he's still alive and may have some life left.
Monday, August 10, 2009
The head-and-shoulders illusion
The so-called "head-and-shoulders" pattern (and most of the sacred TA patterns) can be discerned with remarkable regularity in most 2-dimensional time series graphs of almost any variable with sufficiently complex and numerous dependents.
And it occurs frequently in graphical series produced by random chart generators.
And yet, even given its colossal recent failures, the venerated head-and-shoulders pattern will never die, because people want to believe in it, and it constitutes a powerful optical illusion subject to the human mind's penchant for hindsight bias. When it "works" the mind recognizes it and ascribes it future predictive power; when it "fails", the mind either ignores it or dismisses it as something other than a "real" pattern.
Technical analysis is therefore akin to palm reading and astrology; these disciplines persist because people want to believe in their predictive power. And they appear to actually "work" sometimes.
And it occurs frequently in graphical series produced by random chart generators.
And yet, even given its colossal recent failures, the venerated head-and-shoulders pattern will never die, because people want to believe in it, and it constitutes a powerful optical illusion subject to the human mind's penchant for hindsight bias. When it "works" the mind recognizes it and ascribes it future predictive power; when it "fails", the mind either ignores it or dismisses it as something other than a "real" pattern.
Technical analysis is therefore akin to palm reading and astrology; these disciplines persist because people want to believe in their predictive power. And they appear to actually "work" sometimes.
Saturday, August 08, 2009
The Forgotten Man
As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X....What I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of....He works, he votes, generally he prays--but he always pays.
William Graham Sumner, Yale University, 1883
William Graham Sumner, Yale University, 1883
Saturday, August 01, 2009
Technical Analysis, continued
It is worth remembering that no single charting technique, wave algorithm, or technical pattern has ever been demonstrated, using rigorous statistical methodology stripped of hindsight and other biases, to perform better in elucidating future market direction than a random signal.
That is just a fact.
And yet as with the medieval alchemists, the "one true formula" will always appear to beckon from the shadows....
That is just a fact.
And yet as with the medieval alchemists, the "one true formula" will always appear to beckon from the shadows....
