how do you think about modern methods to forecast the market. ARE YOU FAMILIAR WITH THESE METHODS LIKE NEURAL NETWORKS OR ARIMA OR GARCH. these are used by international organization like IEA to predict oil gold dollar and ... is it applicable to use them in our predictions?
WHY BUT I THINK THERE ARE MANY TRADERS WORK BY THIS SYSTEMS AND MANY EAs WORK BY THESE METHODS DO YOU HAVE SEARCHED IN THIS FIELD?
nobody or no system can PREDICT the future.
calculation of PROBABILITY is possible but this is NOT the same it is EXPECTATION no PREDICTION.
Anybody who tries to sell a system claiming it can predict the future is a liar and is after your money.
prediction (i.e. using Neural networks, ARIMA, etc ) is done for two purpose.
1. Expected future direction - note I am talking about expected future direction. This is often used as good referencing level of the security prices by many firms.
2. Possible risk analysis - some times knowing prediction interval is more important than knowing direction
Such a mathematical method is good because they always state their own limitation unlike other trading system. For example, Regression, ARIMA and Neural networks will implicitly and explicitly state their expected forecasting accuracy plus their worst and best outcome based on their model.
That is to say that you will know how accurately the model predict on past data (performance on the data) plus you will also know what is potential risk of using such a model in real world application too (i.e. prediction interval and coefficient interval).
Note that prediction interval and coefficient interval gets smaller and smaller with more number of historical data.
When there is little number of data, you have to watch out that model become less accurate because large prediction interval and coefficient interval (more influences on coefficient interval though).
Then how these compare to typical trading method. For example comparing to Japanese candlestick pattern it is used by many traders but they don't give you what is the potential risk of using such a model in real world application.
For example, there is no ways of telling the prediction interval of the Doji candle appeared in EURUSD or any other currency pairs.
Note that I am not here to discuss which trading method is superior. However generally professionals using Regression, ARIMA, etc knows that what is the limitation of their models before they use assuming they have learnt and mastered these models.
So they don't make overly stupid decision either.
Just one interesting discussion. I hope this answers you some of your questions.
Here is some reference about prediction interval for your information.
Thanks for your good answer. Are you familiar with these method? are you work in this field?
I have fair amount of experience of working with analytical professionals using these methdos inside industry and academia.
Yes they do, they are very good at predicting the Future.
Some can only look a few day's into the Future, but others,
more complex ones can Predict and look several Years ahead into the Future.
They just print out a list of prices and dates so you can look up tomorrow's and next weeks trend.
This is how many people became a Millionaire.