Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

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2/7/05
Magic, Hocus Pocus, Illusion, Conjuration, by James Sogi

Before we start, glance up at your light. Now even though you may forget everything I've written, you can say, "I've seen the light." Not being the brightest light, some critical elements of statistical theory did not quite sink in while reading Snedecor, but looking at all the nice pictures in Tufte's Visual Explanations, made some interesting ideas clear.... one of those "light bulb" experiences. Here are a couple of ideas.

Time series data are sensitive to choice of intervals and ending points which allows data mining, multiplicity, or specification searching. A computer can search though varieties of graphical and statistical aggregation and present a finding favorable to one's case. An example is trading time frame. Bullish? ...search through the time frames that show an up trend. The problem is that a 5 minute up trend, might hide an hourly or daily downtrend. Yearly trend may hide the quarterly dip. The choice of time frames is an issue that appears to be a statistical anomaly of time series graphs which lead traders to no end of mischief and loss. Avoid misleading conclusion by examination of all the underlying data. There are right ways and wrong ways to show data; there are displays that reveal truth and displays that do not, and it can have enormous consequences.

Another area relevant to trading is Magic, the art of conjuration and illusion, hocus pocus. Illusionists can make elephants disappear. Illusionists like Ebbers, Fastow can make billions vanish. Nice trick. How is it done? Selective presentation of evidence, distraction, disguise, attention control. Lefevre, Ney speak of painting the tape. What tricks do illusionists paint with the chart...the false breakout, the rapid decline in January, the expanding range, the disappearing gap, the trend. All old chart tricks to fool the unwary.

One of the greatest illusions of the chart is that of continuity: it hides the spread which is the heart of the market. The market is not continuous, but jumps, always a gap between bid/ask. The chart purports to show history, but hides the probabilities of the future. This is where the table, and even the quote board with bid and ask, and statistics using the actual numbers will beat the chart gazer. the chart is missing some of the most important information in the market.