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The stock price and the IFT of the RSI are not independent variables. The
indicator is derived from the price. Clearly the RSI cannot "cause" a change
in the price as it is a derivative of the price. This is the same for any
indicator.
Does this mean that TA is meaningless? I don't see why. All indicators are
filters - no more, no less. They isolate and amplify certain aspects of the
base data in ways which may help us understand price movement better.
There's no magic to causation. We know why stock prices move - at any one
point, a share price will rise if there are more dollars being spent on
buying the stock than selling, and vice versa. End of story. The analytical
problem is that the best measure of that net buying or selling is the price
itself.
When we backtest data we are certainly looking for persistent correlations.
If we think we understand why they happen, then great - but we may be wrong
much of the time anyway. That shouldn't stop us from trading. The whole
point about TA is that its pragmatic - we go with what we see, not what some
(likely bias) analyst is telling us.
Andrew
-----Original Message-----
From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of sebastiandanconia
Sent: Wednesday, September 07, 2005 10:23 AM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: [EquisMetaStock Group] (OT) Entire "statistics" discussion has a
major fault.
There seems to be a widespread confusion between causation and correlation.
If a stock price is in an uptrend and the Inverse Fisher Transform of RSI is
greater than 50 (indicating a "buy" signal, depending on parameter), that's
only a correlation between the IFT of RSI and stock price. The stock isn't
rising because of the indicator, the indicator is rising because of the
stock price and it's the same story with virtually every TA indicator.
So what is the purpose of back-testing this OR ANY indicator if it's not the
cause of stock price movement? The only things that are being generated are
meaningless correlations.
Luck to all,
Sebastian
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