Monday, December 21, 2009
Linear thinking
It is undoubtedly true that the human mind is predisposed to linear thought; not just linear thought, but pattern recognition.
Some of our distant ancestors recognized animal migration patterns, and took advantage of that knowledge to survive. Others recognized crop and weather patterns, also to a comparative advantage. Those who did not recognize such patterns did not leave descendents.
The problem with technical analysis, however, is that it plays upon this intense evolutionary tendency by tricking the mind into thinking it is recognizing predictable pattern in what instead is an instrinisically chaotic and unpredictable system.
Those lines, bands, waves, and algorithms give the mind a false sense of security; the mind wants to see the pattern, because it thinks it can thereby avoid pain and gain pleasure. Technical analysis tricks the mind into believing it can achieve that aim.
But the stark reality is that security markets are chaotic, unpredictable systems, not amenable to predictive pattern recognition. That is why no trading signal, algorithm, or technical pattern, when examined rigorously via statistical methodology and stripped of hindsight and other bias, has ever been demonstrated to work better than a random signal.
Some of our distant ancestors recognized animal migration patterns, and took advantage of that knowledge to survive. Others recognized crop and weather patterns, also to a comparative advantage. Those who did not recognize such patterns did not leave descendents.
The problem with technical analysis, however, is that it plays upon this intense evolutionary tendency by tricking the mind into thinking it is recognizing predictable pattern in what instead is an instrinisically chaotic and unpredictable system.
Those lines, bands, waves, and algorithms give the mind a false sense of security; the mind wants to see the pattern, because it thinks it can thereby avoid pain and gain pleasure. Technical analysis tricks the mind into believing it can achieve that aim.
But the stark reality is that security markets are chaotic, unpredictable systems, not amenable to predictive pattern recognition. That is why no trading signal, algorithm, or technical pattern, when examined rigorously via statistical methodology and stripped of hindsight and other bias, has ever been demonstrated to work better than a random signal.
