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XJO Weekend Charting and Chat - 16th Feb 2018, page-28

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redbacka

9,450 Posts.

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20/02/18

22:59

Post #: 31204180
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Originally posted by 48&34 ↑

Hi RB,
Firstly I would like to say that my posting to which you have responded with some degree of upset was never meant as a spray into your very informative charting and TA.

Now my point is that traders will use a myriad of tools and techniques to try to interpret patterns of price movements to attempt to gain an insight into the next probable movements in price or an index. It does not have to be a method with a grounding in classical statistics, only that other technical analysts have proposed a method or even just a specific line of data points that can provide a good probability of predicting some particular outcome.

My next point is that there is considerable danger in assuming that a "normal" distribution which might be a best fit in describing the variance of a characteristic in a human population can be adapted to variance in a stock market index with a similar degree of confidence.
The Standard Error Channel I believe has an upper and lower line approx 2 standard deviations away from the mid line, the linear regression line. Please correct me if that is not very close to the fact. So 95% of price movements should fit inside the channel according to definition. I assume classical statistics apply here.

A trade initiated when the price touches an upper or lower line that assumes reversion to the mean should be successful the large majority of times, so going against the trend in the immediately preceding time period.
In fact I doubt that this is a reliable trading plan, and an equal weight of opinion would say to bet with the trend continuing, which sees the price move outside the upper or lower band, a lot more frequently than 5% of occasions.

So I again reiterate that I am skeptical that the "normal" distribution is a valid model for a stock market index, and if I am incorrect, it would be a relatively simple matter to place trades that have a high success rate and amass large profits in a fairly short time.
Real world experience indicates that large profits are much more difficult to attain.

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Hi 48.

Yes - the basis of placing bets on a "normal" distribution is a valid model - while the market is "normal".

It is not a valid method when the market is not "normal".

Have a lokk at what you say. Isn't that the essence?

Is there anything new in that? Probably not.

"Firstly I would like to say that my posting to which you have responded with some degree of upset was never meant as a spray into your very informative charting and TA."

So why did you bring up the "Standard Error Channel" when I am the only person I know of who consistently uses the SEC?

But thank you for the compliment about "informative charting and TA."

I would also like to say that I think your posts are more informed and "provocative" than most on the XJO.

Thanks

RB.

XJO Value at posting: 6,026.2
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