What is
BIAS?
Bias is a term used to describe a tendency or preference towards a particular perspective, ideology or result, especially when the tendency interferes with the ability to be impartial, unprejudiced, or objective. In other words, bias is generally seen as 'one-sided'. The term biased is used to describe an action, judgment, or other outcome influenced by a prejudged perspective. It is also used to refer to a person or body of people whose actions or judgments exhibit bias. The term "biased" is often used as a pejorative, because bias is inherently unjust, lacking merit.
And now let's see what
QUANTITATIVE RESEARCH is...
Quantitative research is the systematic scientific investigation of quantitative properties and phenomena and their relationships. The objective of quantitative research is to develop and employ mathematical models, theories and/or hypotheses pertaining to natural phenomena. The process of measurement is central to quantitative research because it provides the fundamental connection between empirical observation and mathematical expression of quantitative relationships.So, it appears pretty obvious that BIAS is the symbol of prejudice and lack of objectivity (or at least lack of impartiality), while QUANTITATIVE RESEARCH is a scientific way to approach problems.
Markets are largely a mathematical problem, not a personal crusade against windmills as some (biased) traders believe. Markets are also a place of cheating (the whole Wall Street industry is based mainly on cheating at various levels), so traders must know that the market rules itself regardless the external events.
Markets are self-reflexives, or in other words, they reflect only themselves, the external events may be taken as an excuse to perform certain actions, but the market does not really depend on external factors but rather on its own internal drivers and dynamics.
The naif market approach typical of so many traders, drawing trendlines or trying to see chart patterns, or counting Elliott Waves, in the hope of identifying tops and bottoms, has been quite often shattered by the cold reality of the market's 'irrational' behavior.
In fact there is nothing irrational in the market's behavior, quite the contrary: the market is a device to make money and as such it always does what is it in the best interest of those who controls it to make money for them. So, the market is always perfectly rational.
Of course some people may not agree with the market's behavior in some occasions, because it does hurt their interests (and their bias, hurting in turn their ego). These people are the ones usually calling the market 'irrational', and in 99 cases on 100 these people are not the ones controlling the markets, they are its victims. That's why they scream: "This is irrational! It must end now!".
Every individual that wants to trade successfully must understand that bias, whatever is based on, should be set aside, together with methods that are not scientifically or mathematically-based. Bias can cost you dearly when trading, and empirical methods like TA, EW and the likes can put you out of the game even quicklier.
An example of this is what has happened recently in the US markets, with the in-famous H&S pattern that was visible on the S&P500 index at the half of July 2009.
[click on the image to enlarge]
As you probably know, 100% of Technical Traders were convinced that this H&S was the clear sign that a new Financial Armageddon was about to begin and soon the SPX would have gone down to retest the sub-700 March bottom, as a minimum.
The problem with all these amateurs is that they forgot to check one very important thing: the odds for that event to happen, possibly using some scientific method to determine them.
In other words: what were the odds for that H&S to be successful?
No-one knew it.
Actually, Technical Traders or ElliottWavers never know the odds for any of the trades they take. They are all gambling, hoping to get a lucky streak.
In reality there were various methods to assess the odds of success for that specific H&S pattern and the traders that did spend their time trying to calculate them decided to go LONG, not SHORT, on July 10, 2009, enjoying fantastic profits the following week, while the rest of the world was biting their nails hoping they were just having a nightmare and to wake up soon.
This chart, for example, was presented to
RL Traders on July 10, 2009 and it is a fine example of how simple quantitative research can assess market direction much better than chart patterns:
[click on the image to enlarge]
The study clearly suggests to go LONG, or the opposite of what the H&S pattern at the time said. Guess who was right...
Another interesting observation could have come from the study of a more sophisticated tool, the proprietary
RL Odds (%) Calculator LONG for the SPX Weekly (below) that on July 10, 2009 showed clearly that the price area with the highest probability of seeing a Weekly LONG reversal was between
889 and
798 (inside the yellow square).
[click on the image to enlarge]
This tool performs historical pattern-matching of self-similar SPX retracements since 1950 and can tell you what to expect on average by every retracement going on in the present, be it up or down. In other words, the tool can tell you on average where a retracement will end and in this case it was telling us that a LONG reversal was about to start very probably between 889 and 855.
Sometimes this tool spots the reversal point to the penny, and sometimes it does spot only the area where the price will reverse. In this case it did not spot the reversal price to the penny, but since the SPX reached
869.32 on July 8, 2009, looking at this graph one should have started to wonder how much downside was still possible (and the answer was: "Probably not much"). Knowing this would have avoided a trader taking a SHORT position based on the SPX's H&S pattern.
What happened after July 10, 2009 is well known:
[click on the image to enlarge]
So, the lesson that emerges clearly by observing the facts without bias, is that there were very clear signals (for those who wanted to see/find them) announcing the probable failure of the Head & Shoulders pattern on the SPX, but traders with bias were too busy in dreaming their future profits, instead than spending their time to analyze the market in a scientific way and the final result was, unfortunately, a tragedy.
The history of the markets it's full of cases like these, there are countless stories of TA patterns, EWaves or trendlines purely based on subjective point of views that failed and caused severe losses.
The saddest part of the story is that these losses could have been avoided if traders would have focused on quantitative research and statistical studies, rather than on their wishful technical thinking.
Measuring the odds for a trade through quantitative research can separate those who stand a chance to make it in the long term in every environment, Bull or Bear, from those who make some lucky gains when the market matches their bias, but then, when the tide turns, end up losing it all because they are uncapable of sending their ego and bias right where they belong: out of the game.
The market is a complex chaotic fractal system where anything is possible, it cannot be treated as a stage to prove how right you and your bias are.
Quantifying the odds for a trade and then take action based on this analysis is the only 'rational' way to approach the 'irrational' markets. It pays off well, on average.
Posted by:
The RL Team
http://www.retracementlevels.com/
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