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Technical analysis of markets

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Mar. 15th, 2009 | 06:36 pm
location: Lyn's
mood: mischievousponderous
music: They Might Be Giants - Particle Man

There's a lot of human effort out there that goes into making predictions about the immediate directions the numbers will make next, and many bets are placed on same.

Some of these theories are quite popular in their often narrowly-focused and specific niches, and many manual and automatic trades are guided by them.

But technically speaking, the market is made of trades. Other things may (or may not) motivate the trades, but each trade also has an effect on the market in and of itself. In the very short term, I would suspect that short-term formula-based trading has more effects on market direction than other factors do.

Therefore, perhaps what these short-term technical-analysis magic formulas are really analyzing is... each other?

If that's true, then the behavior I would expect is as follows: a "magic theory" produces steady, small net trading profits for an arbitrary (and convincing!) period of time, after which there is a sudden, drastic failure (either a reversal, or chaotic behavior) of the model.

I presume this idea is testable by taking some set of these theories and comparing their predictions over a given, sufficiently large period of historical time.

I'll also jump ahead of myself a bit and predict that the same behavior would apply to any set of metatheories.

Disclaimer: Just playing with ideas out loud, and I do not currently trade in any (real) markets.

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