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I find the intensity of feeling on this subject amazing! Comments
interspersed below:
At 6:06 PM -0400 10/19/98, Gabe Hanover wrote:
>
>I would argue that the successful trader's ability to discriminate as to
>when his indicator is valid is nothing more than his utilization of
>independant variables. He may or may not have made an effort to quantify
>his good judgement and may or may not be able to state just how he comes
>to his decisions. In the past this was called having a feel for the
>market. Today, we should be able to identify, quantify and systemitize the
>utilization of all the information a trader used in making his
>*discretionary* trades.
Perhaps we *should* be able to, but in practice, it is very difficult. As I
think Mark B said, any 10 year old child can look at a chart and tell you
the direction of a trend. But it is very hard to write code to do as well.
The human brain is remarkable at some things including pattern recognition.
I think popular "Gambler Indicators" work for discretionary traders for the
following reason. When I see the Stochastic (on any other such indicator)
turn down, it is an alert signal that the market MAY be turning down. I
then scan back through the past price and Stochastic chart to see if I see
other cases (patterns) that look like this one. If I do, I see what
happened to the price.
If I find several similar cases that ended up leading to profitable trades
I feel more confident taking this trade. If similar cases turned out not to
lead to profitable trades, I would tend to pass on this one. In effect, I
filter out trades based upon recognizing past similar situations. (In
practice, the discretionary trader might use several such indicators.)
I do not know how to program a computer to do this. It is easy to program
it to trade if the Stochastic turns down and crossed under some value. If
you do this you get some good trades and a lot of bad ones, ones that the
discretionary method would have filtered out.
>
<snip>
>
>Can we all agree that one or more naked indicators, based solely on price,
>is not sufficient to *reliably* predict future prices? Something more is
>needed. And it is that *something more* which, when properly implemented,
>allows one to be a successful trader.
The gotha in this is what you mean by *reliably*. As I posted earlier, the
simple system:
if Close > Close[1] then buy next bar at market;
if Close < Close[1] then sell next bar at market;
is reasonable profitable when applied to many markets. I wouldn't trade it
but it could only work if prices tended to trend. So I would say that this
proves that past price does predict future prices to a statistically
significant degree. But it works on probabilities as do all such systems. A
success rate of 60% might well be called *reliable by most system traders.
Bob Fulks
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