Lies, lies and the markets

Mark Twain wrote: “A lie can travel half way around the world while the truth is putting on its shoes.”

And he wasn’t even on Twitter.

In the news this week is an invention from Sheffield University that claims to sort fact from fiction in the Twittersphere. This could be helpful if you want to know whether Joey Essex is being completely truthful about what he ate for breakfast … or whether someone on your feed really did just see a man running down the street wearing nothing but a pirate hat.

Of course, its aims are a bit more ambitious than that … picking out the truth and lies among allegations of vote rigging in Kenyan elections … rumours spread during the London riots … with the aim of helping journalists, governments and emergency services judge what to respond to and what to ignore.

I have serious doubts about it. The whole appeal of twitter is that you don’t need to have a ‘credibility status’ to make your comment – If we wanted supposedly ‘reliable’ sources, we’d be reading the newspapers. We look to Twitter to see what everyone else is saying.

And, in the world of trading, if we’re looking for truths and certainties, well … we could be waiting a long time …

Human beings like to have clear facts. And traders are no different.

We want to know what trades to place … what results they will get … and we look to experts and strategies to give us this information.

I hear these questions again and again …

“Which is the best trading strategy?” …

“Which is the best time frame to trade?” …

“Should I sell now?” …

And many traders believe that if only they knew enough about technical analysis, and looked at enough charts – they could find the answers to all these questions.

The problem is that we’re asking the wrong questions here. It’s a bit like trying to learn golf by asking Tiger Woods: Which is the best iron to use? or How hard should I hit the ball?

I’ve been guilty of this mistake myself.

“Does this head and shoulders pattern mean that the price will go down? … I’ll add an RSI indicator … now include some moving averages …”

Surely, with all this gumpf on my chart, my trading signal can’t be wrong?

Oh yes it can!

Does technical analysis work? Well, it cannot tell us what’s going to happen in the future – it can direct us and guide us towards possible outcomes, but if you expect definite outcomes, you’re going to be disappointed.

Trading is all about looking at the information we have … and using that to weigh up probabilities … then making sensible decisions based on those probabilities.

It would be nice if we could replace this with clear facts … stuff like “This technical signal will always be successful” … or even “This technical signal will always give a success rate of 66%” …

The very best we can do is look at past success rates and draw predictions based on those, while taking every precaution we can that we’re recreating those events as closely as possible.

There’s an anecdote I like to use about a mathematics professor … On a Tuesday, he lectured his class on a certain scientific topic … On Wednesday he read a paper which invalidated the lecture … On Thursday, he went into class and told his students: “Remember what I told you on Tuesday? It’s wrong. And if that worries you, you need to get out of science.”

Good science is as much about being wrong as it is about being right.

And a scientific approach to the market is about constantly questioning our methods and beliefs, and about being ready to draw a line through everything we believe and starting again.

Of course we need to rely on strategies – just as good scientists build theories. But ‘theories’ and ‘strategies’ are not the same as ‘facts’ … they are, instead, our best reckonings.

If we mistake these theories for truths – we’re putting ourselves (and our money) in danger. But if we accept them for what we are, we’ll be cautious, reactive traders, constantly improving our game.

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