Friday, October 3, 2008

Environmental Factors and Chart Reading

I happen to think that charts provide important clues to the behavior of participants in the various financial markets.

Of course there are many ways to read a stock chart and consequently it can be more of an art than a science, so when I see some related scientific studies, I tend to take note of their conclusions. One example is Do You Want to Believe? which appeared today in Science Friday.com and discusses an experiment in which subjects had varying degrees of control over their situation and were tested on how likely they were to see imaginary images embedded in snowy pictures

Jennifer Whitson, one of the authors of the report, describes the findings as follows:

“People see false patterns in all types of data, imagining trends in stock markets, seeing faces in static, and detecting conspiracies between acquaintances. This suggests that lacking control leads to a visceral need for order – even imaginary order.”

The bottom line: if your investments have been faring poorly lately and you have had trouble reading the trends, make an effort not to be overly reliant on charts – or at least make sure to use a consistent quantitatively-based approach to analyzing those charts.

2 comments:

bzbtrader said...

Good point. As a die-hard technical trader I know there are many times when my stable of indicators and trading systems generate significantly divergent signals. At those times, I've learned to just stand aside and focus on finding the holy virgin's image on my morning pancake.
Also see http://bzbtrader.blogspot.com/2007/12/merry-christmas.html

Bill Luby said...

John Tierney of the New York Times takes a deeper look at the study I cite in See a Pattern on Wall Street?

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2013 Bill Luby. All rights reserved.
 
Web Analytics