How much of today’s stock market conventional wisdom is actually self-fulfilling prophecies. The study of price action in charts is an activity that permeates all aspects of the markets – stocks – bonds – commodities. Do the “rules” that traders extract from the study of charts evolve from continual positive feedback – prophecy self-fulfillment? Or are chartists discovering natural patterns that exist in prices?
By the way – I am asking a question – not setting you up for an answer.
For instance, a quip like “Fill the Gap” is an expectation that a stock (or anything trading) that gaps up or down will eventually reverse direction and fill the gap. If most traders feel that this market wisdom is valid, then it will most likely affect how they trade a stock that has gapped in one direction or the other. Will this analysis actually affect the market – rather than just be an observation of the market?
For the moment, let’s not worry about quantum theory.
Okay, so the practical question is – can these rules be quantified? Tested? Are they useful? That is what I am interested in – removing the mystery that surrounds conventional wisdom, go beyond normal analysis and create new analysis techniques. Will they be useful? I will leave that to the reader – I will develop the experiments – publish the results – let you determine the usefulness.
Heck, the fun is in the journey – not the destination. If you are more interested in the destination – move on. This is not where you will find the Holy Grail.