TRADING SYSTEMS
For Trading, Not Music
Sound Systems
by Robert Pelletier and Sabrina Carle
Too often, trading systems are based on coincidence rather
than on sound scientific or mathematical principles. Here's how you can
create a trading system based on logic.
Just before the 2004 US Presidential election,
people across the United States were talking about the predictor that had
called the Presidential winner for an amazing 16 campaigns. From 1936 through
2000, the success or failure of the Washington Redskins football team on
the Sunday before Tuesday's Presidential election had successfully predicted
the election's outcome. If the Redskins won, the incumbent's party retained
the White House. If the Redskins lost, the incumbent's party lost. Every
single time. When the Redskins lost to the Green Bay Packers on October
31, 2004, George W. Bush's reelection bid seemed doomed -- if you believed
the hype, that is.
Although we seriously doubt that anybody bet the farm on this predictor,
it was an interesting diversion that had pundits from both parties wondering
if the streak would extend to 68 years. By now, everyone knows that the
predictor was wrong this time. Even as you read this, President Bush is
settling in for four more years in the White House, and for the first time
in the history of the Washington Redskins, the team failed to predict the
Presidential winner. Astonishing!
How could it be wrong? A better question might be, how could it ever
have been right? This predictor went wrong the same way trading systems
that are based on coincidences or curve-fitting rather than sound scientific,
mathematical, or economic principles go wrong. They are all non-sequiturs,
relying on a logical fallacy wherein the conclusion does not follow the
premise.
...Continued in the March issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the March 2005
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
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