What the science says about market direction

 

Do you want to know which way the markets are heading?

Is this a dead-cat bounce before they head further down?

Are we seeing a V-shaped recovery already?

If we study the patterns closely enough, can we make accurate predictions about what’ll happen next?

This week, the work and pensions secretary told Sky News that “if the science was wrong, advice at the time was wrong.”

It sparked outrage from scientists, and I think it really gets to the heart of misconceptions people have about science.

For most of us, science is the stuff in textbooks that we learned in school. If you didn’t follow the book, you’d be marked wrong in your exam.

But not everything in science is as clear cut as the stuff in school textbooks. And even textbooks have to be rewritten sometimes – and fundamental theories, like Newtonian physics get superseded.

There’s an anecdote I like to repeat from a professor who lectured his class on a certain scientific topic on a Tuesday. On Wednesday, he read a paper that 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 not about hard facts, it’s about a process of modelling, questioning and advancing. And at times it’s about being prepared to draw a line through everything we believe and start again.

I’m not talking about this because I want to get embroiled in a ‘follow the science’ debate about Coronavirus, but I see a parallel with accusations thrown at technical trading strategies …

Traders want clear answers …

Should I sell now? Should I buy now? Where should I take profits? Cut losses? Which indicator will give me the best results?

But what we actually get are models built around past patterns.

Having the best trading strategy in place, won’t ensure that the markets bring us profits. The markets are notorious for doing whatever the hell they want to do!

I firmly believe that trading strategies built on technical indicators are the best way to trade, but it’s important to remember that we’re looking at the interactions of unpredictable systems: financial, political, cultural, and the most unpredictable system of all – humans!

So, where do we get the answers we need to make trading decisions?

Technical analysis cannot tell us what’s going to happen in the future, but it can direct and guide us towards possible outcomes. But if you’re expecting definite outcomes, you’re going to be disappointed.

Trading is about looking at the information we have … and using that to weigh up probabilities … and then make sensible decisions based on likely outcomes.

Good science and good trading are as much about being prepared to be proved wrong as they are about being right.

And a scientific approach to the market means we should be constantly questioning our methods and beliefs.

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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