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[sharechat] Hugh's Test

From: Phaedrus <>
Date: Tue, 26 Jun 2001 16:08:57 -0700 (PDT)

        Thankyou for your thoughtful and reasoned response.  Let me address its 
main points :-

"The problem is you saying your argument is logical."  My argument at its most 
basic is :-
      Up and down Trends exist.
      Knowledge of them helps when making trading decisions.
      They can easily be seen on charts.
      Charts are therefore helpful.
 Which do you see as the false statement, or illogical conclusion?  

"You have assumed that because you can draw a line of a chart showing a trend 
you can extrapolate
the future"  Absolutely not. Nothing is assumed, and at no point have I ever 
claimed to extrapolate the future. 

"or at least make a logical decision at that point."  Right. I see myself as 
being able to make logical decisions at any point. Time will tell if they turn 
out to be profitable decisions or not. They can always be logical and 
objective, though.

"TRENDS ARE ALWAYS PRESENT IN HISTORIC DATA"   Jeremy, I have taken the liberty 
of putting this statement of yours in capitals, because it is so true, and so 
important. It forms the basis of Dow Theory, and Technical Analysis. It is the 
point of commonality from which our views diverge. 
  All data is historic. There is no other sort. If our data is from records of 
a truly random event such as tossing a coin, or the spin of a roulette wheel, 
no long-term trends will ever be evident. The ratio of heads to tails will 
remain at 1:1. The numbers from the roulette wheel will still cover the same 
range. By stark contrast, stock prices do, on occasion, trend, sometimes for 
years at a time. 

"extrapolation of a trend from NOW in an inherently chaotic system (I use the 
term in a correct
mathematical sense) produces no net benefit."  I disagree on two counts. 
Firstly, the system is not inherently chaotic. If it were, there would never be 
orderly trends, let alone long-term ones. Look again at the Telstra chart. For 
over a year someone was tossing 3 heads for every tail as the stock rose in a 
steady trend from 330 to 920. Then, quite suddenly, they began tossing 
approximately equal numbers of heads and tails. This phase lasted for over a 
year. Then they began tossing 2 tails for every head. This phase has continued 
for 18 months. I see order here, not chaos.
 Secondly, extrapolation of the trend does produce net benefit. This technique 
enables you to see very easily if the trend (the ratio of heads to tails) is 
being sustained, is weakening, or has ended. We could see exactly when the raio 
of heads to tails dropped below 3:1.

"(You must show that your) system at time T, using only data known at time T, 
can predict the future price on a variety of time scales and hence allow you to 
make money above and beyond the natural market growth." Not at all. I am unable 
to predict future prices. Knowing this, I do not even try. What I can do, 
though, is observe when established trends end, and act accordingly. 
  I am reading between the lines here, Jeremy, but are you saying that it is 
impossible to make money above and beyond the natural market growth rate? That 
it is impossible to consistently beat the Index? If you choose to respond to 
this post, please address those two queries specifically. I suspect they may 
represent a crucial difference in our respective views of reality. 

"I have never seen a published objective model of the market, using only price 
data and volume before a particular time T, that correctly predicts -on 
average- the future price of shares and hence makes objective decisions about 
buying or selling."    You never will. It is impossible. In any case decisions 
based on predictions could hardly be called objective. It is still possible to 
make decisions about buying and selling based on objective criteria, though. 
For example, the observation that an uptrend that had been running for over a 
year has ended, leads quite logically to a Sell decision.

"I am sure you can't consistently publish buy and sell recommendations before 
the event that make - on average - better returns than the overall market." 
Dead right. I can't. But this does not stop me from consistently making - on 
average - better returns than the overall market. Lots of people do. Lots 
don't. That's what makes the average.


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