risk/reward trades.
How about breakouts that occur because there is a story in the
Wall Street Journal
that day?
That would be much less relevant. The Heisenberg principle in physics provides an analogy for the markets. If
something is closely observed, the odds are it is going to be altered in the process. If corn is in a tight consolidation
and then breaks out the day the
Wall Street Journal
carries a story about a potential shortage of corn, the odds of the
price move being sustained are much smaller. If everybody believes there is no reason for corn to break out, and it
suddenly does, the chances that there is an important underlying cause are much greater.
It sounds like you are saying that the less explanation there is for a price move occurring, the
better it looks.
Well, I do think that. The more a price pattern is observed by speculators, the more prone you are to have
false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical
breakouts.
Has the greatly increased use of computerized trend-following systems increased the frequency of
false technical signals?
I think so. The fact that there are billions of dollars out there trading on technical systems that use moving
averages or other simple pattern recognition approaches helps produce many more false signals. I have developed
similar systems myself, so that I can tell when the other systems are going to kick in. If it is clear that prices are
moving because these billions are kicking into the market, it is a lot less interesting than if a breakout occurs because
the Russians are buying.
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