Technically Speaking, a Lot of People are Fooling Themselves
By Don Chambers
Two recent meetings on my calendar were in such stark comparison that they are worth noting.
First, I met with a former colleague – a dear friend and a long time financial expert – who has been using very advanced software and a ton of computing power to find out if artificial intelligence programs can find patterns in stock prices. He has minute-by-minute price data on hundreds of stocks for several years. The computer processes the data over and over trying to learn what connections might exist between past and future prices.
He may or may not be finding useful results, but he has been at it for quite a while and will continue to crunch numbers thanks to the incredible speeds of computers, the power of artificial intelligence software and the massive data available.
I also attended a meeting of technical analysts who search stock price charts looking for signals that might indicate profitable trading opportunities. They discussed about 4 stocks and spent about 15 minutes on each of them. They looked at one large chart for each stock and discussed all the possible signals that their plethora of theories could infer. They have been doing this part-time for quite a while and they enjoy it.
I left without commenting on how out-gunned they were. Because it is not just my dear friend who is light years ahead of them. There are tens of thousands of brilliant analysts throughout the world working in hedge funds, brokerage houses, investment banks, and even in bathrobes in their bedrooms to beat these slow-poke technical analysts in the contest for trading profits. Taken together the data, software and computing power being focused on this search is incredible.
Artificial intelligence will eventually beat every human mind at this game if it has not already done so. It is only a matter of time. I remember that back in the late 1970s some people were still claiming that a computer would never be able to consistently beat a grandmaster at chess because the computer could not think creatively. Now chess computers are hundreds of points better than the world’s best humans. The technical analysts who brag on TV of their stock-picking skills are likely already obsolete. Only the best truly wins such contests in the long run – and the best will be defined by who develops the best artificial intelligence software.
Wealth is best grown and protected through diversification, wise risk management, smart tax planning and minimization of trading costs – almost all of which are sacrificed when implementing active technical trading strategies.