The Chart Illusion

Timing Dragons

Although, logically, I’ve always felt that the idea of investing by charts should be something on the map between “Dragons” and “Free Lunches” I’ve never been so sure of this as to be outright skeptical. And I know a few smart people who insist that they are at least helpful in timing investing decisions.

Of course, the idea of “timing” anything in investment is fairly ludicrous anyway, but some recent research suggests the whole charting concept does actually help in prediction. Unfortunately what it predicts is a bunch of irrational self-fulfilling behaviour.

Read Full Post >>

Google Charts You Can Trust

Exploit and Vanish

Although many investors rely on charts to time trades the actual evidence that this yields any kind of advantage is vanishingly small.  It’s not zero, however, as we saw in Technical Analysis on Display, because there’s a faint suggestion that human pattern recognition is so finely tuned that it may be able to extract information from the noise that machines cannot.

Intriguingly, though, research on Google search data suggests that there are exploitable trends in information signalled by interest in specific stocks.  Unfortunately merely publishing this fact almost certainly signals its demise as a useful prediction tool.  Exploit it while you can, because if you don’t, someone else will, probably using a supercomputer.

Read Full Post >>

Technical Analysis on Display

Patterns in the Stars

The idea that technical analysis of stocks – the extraction of useful trading data from various charts mapping share prices and other data – is actually anything more than a hangover from pre-computer days is generally scoffed at by those who spend their time number crunching. From these lofty heights chartists are generally regarded with the same distain as scientists reserve for astrologers.

Which may be justified, or not, but there’s one area where the human brain can still outperform microprocessors: the unconscious extraction of patterns from visual information. Is it, in fact, possible that technical analysts are simply using the brain’s unique pattern recognition capabilities to outwit the supercomputers?

Read Full Post >>

Technical Analysis, Killed By Popularity

Heisenberg’s Investment Principle

In quantum mechanics the Heisenberg Uncertainty Principle expresses the finding that in attempting to measure anything at the sub-atomic level you inevitably change what you’re measuring. You can determine a particle’s position or its speed but never both at the same time.

In stockmarket investment a similar thing happens whenever someone identifies a sure-fire way of making money. No sooner do they publish their findings then their technique fails. It’s all down to human psychology and it’s the same reason why popular technical analysis techniques can’t reproducibly produce above average market returns. Heisenberg rules, OK?

Read Full Post >>