Trade Ideas Blog
Don’t be Fooled by Pattern Recognition
May 11, 2012
The Lure of Pattern Recognition (Be Very Careful)
Everyone who is in the market is looking to do the same thing, make money. Institutions and hedge funds call this “alpha”. The game of Making Money is a very competitive environment. When you place a trade you are competing with highly funded well staffed opponents. The efficient market hypothesis says that you can’t beat the market because all available information is already available and in the market (http://en.wikipedia.org/wiki/Efficient-market_hypothesis).
Individual investors typically have zero access to advanced computer models so they rely on the one thing that is available to them for free, intuition. They they look at charts, draw trend lines, and infer patterns to make investment decisions. The problem is that there is a large amount of scientific evidence that suggests our brains are wired poorly for this type of visual analysis. Consider the case of eye witness testimony.
False Misidentification http://snitkof.com/cg156/eyewitness.php
Alarming statistics state that in 2000, of 62 cases that involved the conviction and imprisonment of individuals for felonies, 52 of them-including 8 of them that had death sentences-involved mistaken eyewitness identifications. These individuals were later acquitted of these charges with the use ofDNA testing.
|Trade Ideas users don’t have to read the tea leaves and guess patterns.|
Trade Ideas technology is by far the best piece of technology to help you identify when this window of opportunity is present. This post is the first in a series from Trade Ideas highlighting the importance of leveraging technology in the right way to truly capture alpha and not getting misled or distracted by the noise of a chart or your gut.
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