Forecasting Folly

I promise to bust out a few new original posts in the coming days.  In the mean time, here is the folly of Elliot Wave perfectly summed up by Tim Knight from Slope of Hope.  While Tim may not be willing to make fun of EW, I’ve made my feelings about Bob Prechter and EWI very clear.

A widely-read publication that tracks Elliott waves has, over its three most recent issues, stated up front that:

“A last burst of excitement has carried prices above last week’s highs in what should amount to the final subdivisions of wave c (circle) of 2.”

and, in the following issue……

“The wave formation as well as the accompanying technical condition continues to indicate that the rise since the first days of July is close in time to reversing.”

and then, the next issue……..

“The wave structure of the market’s near-term advance is very close to ending..which means a trend reversal from up to down in stocks. The next leg lower is fast approaching.”

It all reminds me of a term from the software business that I learned back in 1990: “Real Soon Now” – which usually means, “probably before we have successfully colonized Mars.

This isn’t meant to make fun of EW, but it certainly captures my frustration at the grind-the-bears-up market we’ve seen over the past 5 weeks.

I’ve seen this countless times.  Someone makes a forecast and the market doesn’t go their way.  Instead of accepting that they may have been incorrect in their assessment and reevaluating, they double-down in their conviction.  This may work for a while, and when it does it’s an awesome feeling of victory.  Be careful mixing stubbornness with leverage, because is can cost you your whole account and more.

From David Varadi of CSS Analytics:

The strangest thing about the forecasting world is not that it is a dismal science (which it is) but rather that forecasters share some remarkably primitive biases. Whether you look at purely quantitative forecasts or “expert/guru” forecasts, they have one thing in common: they rarely change their opinions or methods in light of new information. In fact, what I have noticed is that the smarter the person is and the more information they seem to possess, the less likely they are to change their mind.Undoubtedly this is why many genuinely intelligent and knowledgeable experts have blown up large funds or personal trading accounts. Ask a person to give you an opinion on where a market is going, and then notice what happens when the market goes dramatically the other way along with news announcements that seem to conflict with their thesis.  Most of the time this person will tell you that they have not changed their mind, and in fact that it is an even better price to buy (or short). Models or systems suffer from the same problem–they typically do not adjust as conditions or regimes change, nor do they observe their own profitability as a cue. Most economists or technical traders build a framework that assumes continuity and self-similarity of the environment in which a forecast was made in the past.

Source:  Short-Term? Long. Long-Term? Short. (Slope of Hope)

Random Musings about Forecasting and Decision-Making (CSS Analytics)

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