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>Subject: Gambling Indicators: They work!
> Date: Mon, 19 Oct 1998 08:15:04 -0700
> From: Gabe Hanover <gabeh@xxxxxxxxxxxxx>
> To: Omega-list <omega-list@xxxxxxxxxx>
>
>
>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?
=====================
Actually, in your example you are using "brown eyes" to predict beagles.
This is a fallacy, since other creatures besides beagles have brown
eyes.
To be correct:
All beagles have brown eyes. Bob is a beagle. Therefore Bob has brown
eyes.
Ergo, beagles do predict beagles. And the color of beagles' eyes.
You can use a class to predict a subclass, but not the other way around
(Logic 101).
Therefore price might be able to predict price IN ITS OWN SERIES, but
not the price of another series, such as the Dow. However, the Dow may
predict a stock price, especially since that stock may be part of the
Dow. Add an industry index and you may have a better chance.
Let's try this :
Momentum leads price. Momentum is increasing. Therefore price will
increase.
This syllogism is logically correct. However, it fails in usage because
the assertion "momentum leads price" is, so far, unproven.
Let's try this one:
Popular stocks go up. YHOO is a popular stock. Therefore YHOO will go
up.
You may say that ""YHOO goes down lots, too!" Yes it does, but it comes
back. Not so with unpopular stocks. However, that is sort of begging
the question: a stock is popular only if it goes up after going down.
So psychology may be more important than logic:-)
If you want to use syllogisms, remember that your assertions must be
true ALL THE TIME. This may make them unsuitable for technical
analysis. However, if you find one that IS true (i.e., all the time,
such as momentum leading price), you will make a fortune.
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