What continues to amaze me is that there does not seem to be any convincing scientific evidence that predictive patterns can be found in past price movements, and yet many reputable investment firms are throwing a lot of money at this problem.
I understand that not all quantitative approaches depend on finding patterns in past prices, but some do.
I am completely undecided on this one. It baffles me. It's not like every company applying materials science also experiments with witchcraft somewhere in the basement, so what's going on here?
There are predictive short term patterns, but once the knowledge of the patterns spreads, they start to disappear. There is also constant change in long term patterns because the world outside financial market changes unexpected ways.
Financial markets are self reflecting system where people who invest are inside the the system and change it.
If you discover pattern that makes money, you must keep it secret and establish firm that tries to exploit it. If you are successful, others notice it and start to analyze your game and the edge starts to disappear. You may use machine learning to discover constantly new patterns but that does not change the situation, because others also use machine learning to detect new patterns.
Portfolio managers seeking high alpha are often poker players, because Poker and alpha seeking are very similar games.
But banks also employ technical analysts who use well known technical signals like support and resistance. Your and lumberjack's theory does not apply to them and yet they get paid.
No they don't. Technical analysis is to professional trading what astrology is to astronomy and big banks don't use them. Those books are snake oil sold to hobbyists and small time traders.
Large banks, investment management firms use completely different statistical methods.
I understand that not all quantitative approaches depend on finding patterns in past prices, but some do.
I am completely undecided on this one. It baffles me. It's not like every company applying materials science also experiments with witchcraft somewhere in the basement, so what's going on here?