Stocks & Commodities V.

4:8 (291-291): In This Issue by John Sweeney

In This Issue
by John Sweeney

I 'd guess that a good chunk of our readers are wondering why we're running all this material on
statistical analysis. We run articles by Clifford Sherry on convenient statistical techniques. We run
articles by Frank Tarkany who uses those techniques to define trading windows. We run other articles
using statistics to define stop points.
I do it for two reasons: (1) they are laying the groundwork for a rational basis for technical trading and (2)
they give us usable techniques to combat fear.
If Tarkany is correct, there are periods within which stock price movement is not random. There are
periods within which stock price movement does "depend" on previous prices. This is a first giant step
because, if it is true, then there are patterns in these price movements, patterns which we can hope to
discover eventually.
Of course, we don't know what those dependencies are or how the price changes are non-random. Some
would say the prices are cyclically dependent. Others would cite waves of various names. Even if they are
correct, this is still descriptive of price behavior, not explanatory. My guess is that we are a long, long
way from understanding mass behavior though I would be delighted to be wrong.
Technical analysis' claims in the past simply were: it works better than fundamental analysis. This is
gradually being accepted in the trendlines even though few are willing to defend it intellectually. Now we
can say objectively, "We don't know what's there but, whatever it is, it isn't random. There's something
going on here."
The next step is to test these techniques on other series to see if they, too, exhibit similar properties. It
will be interesting to see which do and which don't.
Then, we must extract the explanatory behavior—cycles, waves, chart patterns, you name it—and see if
the remainder is random and/or serially independent. Whatever converts the series to randomness will be
the most likely explanation for non-random price changes. Then we'll have a really good fix on what does
work and, possibly, some insight into why it works.
Oh, yes—what about fear? Well, once you know something, you fear it less.

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Stocks & Commodities V. 4:8 (291-291): In This Issue by John Sweeney

Good Trading!

Article Text Copyright (c) Technical Analysis Inc. 2