V.8:2 (66-69): Staying with the markets by Eric L. Sharp

V.8:2 (66-69): Staying with the markets by Eric L. Sharp
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Staying with the markets by Eric L. Sharp

Experience is a great teacher, but she charges such horrendous fees. Traders in both the cash and futures markets know that better than anyone. Anything that increases your insight into directions and targets for prices can replace some costly lessons. For years now, I've used a combined process of statistical and technical analysis for making investment and trading decisions. The results of the statistical analyses give me a framework for making projections and recognizing over- and under valuations. That adds to my confidence in applying technical analysis for timing, and "gutsing up" for the actual trades.

The field of statistics supplies a method for mathematically working out relationships between causes and effects. Multiple regression analysis is what it's called. It's used in science, engineering, medical research and even in projecting the outcome of elections. In analyzing investments, we look at the price of an investment as an effect. Then we search for possible causes.

Let's take gold prices. The monthly average prices (the effects) for the past five or 10 years can be compiled and analyzed against an number of potential causes. Some possibilities are Consumer Price Index (CPI) inflation, Producer Price Index (PPI) inflation, various foreign exchange rates, money supply, other metals prices, industrial production, the I.Q.'s of elected officials, and so on. The list of potential causes is endless. (Of course, the unavailability of some data is a problem just try to get a congressman's I.Q.).

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