Schrödinger’s Cat by John F. Ehlers
Random With Memory
What information is contained in market data? Can you develop an indicator or trading system that can extract this information to provide an edge in trading? Here’s a look.
The purpose of technical analysis is to discern what information is contained in market data and, if you are clever enough, to develop an indicator or trading system that extracts this information to provide an edge in trading. On the other hand, there are those who believe in the efficient market hypothesis: that all the information about the markets is known and the effects are purely random due to the law of large numbers of traders. The discussion goes downhill from there.
One of my favorite theoretical descriptions of market activity is the drunkard’s walk. When the random variable is position, the partial differential equation solution is called the diffusion equation, and it describes random motion like a particle of smoke in a smoke plume. When the random variable is momentum, then the partial differential equation solution is called the wave equation. Taken together, the drunkard’s walk describes physical phenomena like the meandering of a river, which can be random (trending) or cyclical. Unfortunately...