Smiling proudly at the stock futures exchange, smashing Wall Street! Hello everyone, welcome to the Technology Paradise, I am Lao Zou, the owner of the park.
In fact, when we discuss technical analysis, we often encounter some similar questions, such as the so-called "self-fulfilling prophecy". There is also "Can past price data be used to predict the next price direction?" and so on. Opponents always emphasize that "charts record the ins and outs of market prices, but they cannot tell where it goes." Obviously, if you don't know how to read a graph, of course you won't see the way from the graph. That aside.
We have noticed that among the voices against technical analysis and forecasting, the random walk theory is the most active. This theory holds that prices have no trend at all, and the implication is that no forecasting technique is better than simply "buy it, hold it in your hand and wait". Is this really the case? Let's demonstrate one by one.
1. Can the past predict the future?
Can past price data be used to predict the future effectively? This is one of the biggest controversial issues in technical analysis. I find it very strange why those who oppose technical analysis always come up with this magic weapon; in fact, everyone knows that every forecasting method, from weather forecasting to basic analysis, is based on the study of historical data Up. Other than that, what else is there to choose from?
The theory of statistics is divided into two parts: descriptive statistics and inferential statistics. Descriptive statistics refers to the use of graphs to represent data data, such as a standard line graph to display the price history. Inferential statistics is the derivation of general, predictive, or inferred conclusions from data. Therefore, the price chart belongs to the former category, while the technical analysis on the price chart belongs to the category of derivation statistics.
As one statistics textbook puts it: "The first step in business or economic forecasting is the collection of historical observations." Chart analysis is just one form of time series analysis, and like all time series analysis, it is historically based. No matter who, the only information or data available is the past records. Only by projecting past experiences into the future can we estimate the future. Another passage from this course:
Population forecasts, industry forecasts, and more are largely based on the study of what happened in the past. In business and science, as in everyday life, we rely on past experiences to project into an elusive future.
Taken together, technical analysis uses past price data to predict the future and has a solid statistical basis. If someone insists on doubting the foothold of technical analysis in this aspect, then he has no choice but to overthrow all the knowledge of studying the future based on the past, of course, all economic analysis and basic analysis are inevitable.
2. Random walk theory.
The theory of random walk originally originated and became popular in the high intellectual class. It assumes that price changes are sequentially independent of each other. Thus price history is not a good clue to future price direction. In short, price changes are random and unpredictable. This theory "walked" everywhere through the book "Random Walking Characteristics of the Stock Market", and became famous for a while. Edited by Paul H. Kuttner, the book was published by MIT Press in 1964. Since then, both the pros and cons have written books and argued endlessly. The theory is based on the efficient market assumption that prices fluctuate randomly above and below intrinsic value. It also deduces that the best market strategy is to simply "buy and wait" against attempts to "beat the market".
All markets do have some amount of randomness, or "noise," but it's not true to think that all price changes are random. It may be more reliable to judge this lawsuit based on experience and practice, and complex and advanced statistical methods either seem to prove everything the researchers preconceived, or they can't deny anything. Randomness everywhere is actually just a synonym for the inability to identify systematic price changes. You may wish to keep this in mind. Many scholars are unable to reveal the price pattern, but this does not prove that the price pattern does not exist.
When the market trend is clear, is the trend of value to general market analysts or actual traders? Academics are arguing endlessly. If you also have doubts about this point, just look at any chart book (picked at random), and you can intuitively see that the trend does exist objectively. If the price change has nothing to do before and after, it means that there is no trace of what happened yesterday or last week today or tomorrow, so how can you explain the trend that is visible to everyone? Many trend-following systems have achieved results in real transactions Brilliant and profitable, how can we explain it? Timing is the key in the foreign exchange futures market. How can "buy and wait" work? Should we sit and wait with these positions in a bear market? How can an investor know the difference between a bull market and a bear market if prices are unrelated, and price changes are neither trending nor predictable? In fact, "buy and wait" is tantamount to an upward trend, so how can a bear market exist?
Whether the statistical evidence will conclusively confirm or completely disprove the random walk theory, God knows, but random theory has no market in technical analysis circles. If markets were truly random, no forecasting technique would be reliable. The efficient market assumption is exactly the same as one of the premise of technical analysis, "the market is inclusive and digests everything", but it does not negate the advisability of technical analysis. The academics also found that the market digests all information quickly, and there is no way to make money by being well-informed. Here they finally touched a little bit of the theoretical basis of technical analysis, that is, important market information is already absorbed by market prices before it is widely known. The academics are self-defeating, and instead clearly demonstrate the importance of keeping a close eye on price changes, trying to profit from fundamental intelligence is, at least in the short term, hopeless.
Finally, we must admit that any process will appear disorganized without understanding the specific rules by which the process proceeds. For example, an electrocardiogram may look like a long series of chaotic noises to a layman, but to a trained doctor, every small twist and turn in it is full of meaning and certainly not random. For those who have not spent time studying the behavior of the foreign exchange futures market, market movements may also be random. The illusion of randomness fades away as image-reading skills improve. I believe that you will experience this phenomenon for yourself as you gradually study the chapters of this course in depth.
Now that we have laid a solid theoretical foundation for technical analysis and clarified some common doubts about technical analysis, we can get down to business. Starting from the next class, we will choose the most famous technical analysis theory with a long history - Dow Theory as the starting point, and start the discussion of technical analysis for everyone!
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