Filed under: data mining in finance, financial data mining, influencing predictions, technical analysis
As you may know, I have started applying data mining in a small financial company in Switzerland. I have thus read some books about technical analysis. The aim of technical analysis is to use technical indicators (that are based on daily stock prices) to predict the future trends of stocks in the short or mid term. I was surprised to read in a book that the author compares stock market predictions with weather forecasting.
I personally think that there is a big difference between these two tasks (at least conceptually). It concerns the influence of your predictions. With the stock market, people are using technical analysis to buy and sell and thus influencing what they are predicting. Millions of traders and quantitative analysts in the world are using the same set of tools and acting consequently. This is not the case with weather forecasting. Even if millions of people can predict exactly the weather for the next day, it won’t change anything to the weather of tomorrow. This is an interesting difference between these two tasks.
Of course, stock market is not only dependent on traders who believe in technical analysis. Most of the influence certainly comes from the offer/demand couple as well as every day news. Also, several people around the world do not base their strategies on technical analysis but rather on fundamentals (information coming directly from companies). What do you think of this issue? Are technical analysts really influencing their own predictions? Feel free to post your opinion.