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I would like to expand the discussion regarding indicators. In addition
to the problem of lag, there is a more fundamental problem. There is a
philosophical argument which I think is applicable here: You can not
predict A with A.
For example, take the syllogism: All beagles have brown eyes. Bob has
brown eyes, Therefore, Bob is a beagle. What went wrong? We are using
beagles to predict beagles. This is a logical fallacy. Likewise, prices
and indicators based on prices, contain no inherent predictive
information and cannot be used a price predictors. Why do they seem to
work? Two reasons are: 1) They can identify, but not predict the future
of trends; and, 2) When a sufficient proportion of market players act
according to a favored indicator, it becomes a self fulfilling prophecy.
While, I'm sure you can think of additional reasons, I would argue that
none of them support the argument that indicators are valid price
predictors.
Where does that leave us? If you were fortunate enough to take
Statistics 101, you know that multi-linear regression analysis is
perhaps the best tool for predicting A. It does not use A to predict A,
but rather, it uses independent variables b, c, d, e. etc. For us, this
means using indexes, market statistics, sentiment indicators, interest
rates, another stock, future or group and any other independent numeric
indicator to predict the future of A, except A itself.
Does anybody doubt this? Am I going over old territory?
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