Pattern Analysis and the dilemma of uncertainty and probability:
Hello Les,
I’ve been thinking about one of your questions regarding the statistical analysis of various patterns and the expected probability from these patterns.
With pattern recognition, I think all of us are making our best shot guess, whether we dress it up with algorithms based on moving averages, or if we use the “computer between our ears”.
I’d argue that analysis is (I suspect necessarily) subjective since it depends on the reasoning process of the individual, their capacity to observe (keenness of senses and mind, experience and access), environmental factors, and the quality and quantity of information available to them, and the time available to process the information and the will to do so productively.
This is a dilemma that I suspect is one of those perennial philosophical conundrums which is to do with the way humanity struggles with understanding the past and trying to second guess the future. (Duc, you’d know about this).
The core question is “to what extent can we predict future events by studying and understanding the past”. It’s partly a history question along the lines of the concept that if we don’t learn from the lessons of the past, we are doomed to make the same mistakes in the future.
If you remember Bronowski’s “The ascent of man” BBC program, I remember the inspirational episodes where he talks about humanity standing on the brink of knowledge feeling forwards. I think trading is like this, we are standing on the brink of price action as it unfolds, feeling forwards.
Douglas talks about not having to know what is going to happen in order to make money if you are employing an edge. The primary problem of comparing different systems is that there is no objective standard to measure them by, only the current performance.
The term “past performance is no indication of future performance” comes to mind. What I’m getting at is that even the most robust predictive system in any field is often thwarted by reality. The rapid fall of France in 1940 seemed impossible until it happened, didn’t it?
So, what’s this all about? When researching past charts of indexes and commodities, there do seem to be patterns which seem to be repeated. The dilemma for me is that I do believe every moment in time (every event) is unique, and anything can happen. So, on this front I think we need to be flexible in our thinking, and I suspect that the creative side of the brain is better at imagining the future based on the plethora of subliminal observations we make.
But I do think that there is information imbedded in charts that can, if recognised, reveal clues about where the market might move to. Wave theories are about looking at the way markets seem to trend in many markets in many different eras. Statistics tries to collate past data to extrapolate the potential for future events to unfold.
I think that works like Heisenberg’s uncertainty principle, and the concepts underpinning quantum mechanics and chaos theory are near the mark about recognising the myriad of “tipping points” in events where many different possibilities, and their outcomes lead to what really happens.
Where I’m struggling is marrying the more orthodox statistics with a kind of quantum base. Some patterns work well in some markets and not others for instance, and then these patterns only work under certain conditions and in certain eras. I have a strong suspicion that the modern day orthodox regimen of back testing has a set of fatal flaws in it, and I am reminded of the logic behind George Soros’ reflexivity thesis about the division between perception and reality, and the whole notion of the self fulfilling prophecy.
Perhaps Frank is the new “Gann” of our age, and I would welcome this if he really has made such a profound break through. I am currently persuaded that time is one of the most vital elements in trading, and look forward to grasping his perspective. But I have concerns with Frank’s sweeping certainty that he alone has the key to predict the future in the markets with his time approach, and that no other discipline can do this. While I respect the work he has done, and would like to study it more deeply, I still come back to this core dilemma, and wonder if he has solved it, or is like the rest of us using his version of the “art of the possible”.
I suspect no one has a monopoly on forecasting time, and I suspect there are many different tools which are looking at the same thing, but I have no way to measure their respective accuracy (in part because of the uncertainly principle).
Look forward to hearing the responses to these observations
Regards
Magdoran