During discussion about things where you had strong opinions and then changed your mind, someone mentioned EMH. Do you believe in EMH and if so is it strong or weak version?
I used to believe EMH but not strongly. The pandemic changed my view because I managed to invest some money when the stock market dived and was clearly influenced by overly pessimistic view of the impact of covid. Some might argue that the market reacted to the irrational government measures, so it is not that the case that the market was mistaken. I still think that investors were equally irrationally pessimistic. I reject the view that this is a hindsight and I was merely lucky. I am not big expert and I did not possess any proprietary information. I had the same information as everybody else, I just didn't let my emotions take over me. This is further confirmed that even today when all the events have passed exactly as predicted, majority of people still maintain their mistaken views that covid was very dangerous to young and non-risk population.
It is the only time when I saw the rest of the society to be so wrong in their views and clearly this was my once-a-lifetime chance. I haven't see any other opportunities for easy money so far but I think that people who are experts in their fields and investors might have been able to find more opportunities.
One of them was found by Michael Burry who definitely saw that the 2008 financial crisis was coming. He wasn't just lucky because he had read and analysed all the documents and had to create special investment instruments to profit for it. In this way, it wasn't easily accessible by laypersons like me who have no time or understanding about investment. Again, most professionals were blinded by collective frenzy.
What is your opinion about EMH?
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Notes -
The strong version of EMH says that nothing, even insider trading, could generate excess returns. That's obviously, trivially false.
The weak version of EMH just says that technical analysis can't generate excess returns. The existence of successful TA-based hedge funds goes against this pretty overwhelmingly.
However, the existence of a debate at all can imply a sort of weak-weak EMH, which means that markets are fairly efficient, and that beating them is no small feat. It'll require a lot of investigative legwork, above-average intelligence, or both.
What are some successful TA-based hedge funds? I was under the impression that successful trading generally requires features other than price, so this would be a significant update for me.
Quant funds like DE Shaw fit the bill. Quant isn't a perfect analog, but their algorithmic trading definitely isn't fundamental analysis from what I can gather.
Ah okay. I agree that those firms make money but I don’t think I would call what they do technical analysis. In my mind, technical analysis is stuff like drawing lines on charts and squinting until you see patterns that aren’t there. Trading firms run a lot of different strategies but my understanding is that it’s more about anticipating various flows and the state of the order book than purely looking at price charts.
The weak form of the EMH specifically says that you can’t predict future prices based on past price data. I don’t think the existence of DE Shaw contradicts this.
I'm almost certain that funds like DE Shaw use stuff like SMA, EMA, Bollinger Bands, and other TA indicators in their purchasing decisions.
Unless they're front-running, I don't see how they'd do stuff like this without using the order book's recent history... and the order book is just a more in-depth explanation of price, so most people would call it a form of technical analysis. Really, any form of extremely short-term trading is almost certainly going to be using TA a lot. What else would they use? FA stuff doesn't work well for intraday trading.
The fact that they use sma and ema does not mean that it is what makes them earn money. If I use both astrology and science for agriculture, I will make money (astrology is useless, thus it is harmless) but it won't prove anything about astrology.
And what he is saying is that there are strictly more informations in the order book than in the price.
This has the garden gnomes problem of "ok, so what ARE they using?"
Let's arbitrarily assume that TA indicators are either not used in their trading strategies at all, or are simply used to confirm preconceptions of better indicators. I doubt this is really the case, but I'll entertain the notion for the sake of the argument.
In that case, what are the better indicators they're using? To use your example, what's the "science" here? They have to be using some other indicators that enables long-run success of short-term intraday traders. Whatever those indicators are, they're still going to prove the weak version of EMH incorrect.
What if they developped their own indicators? Would it count as special knowledge or as proving EMH incorrect? Genuinely asking
If their indicators are performing well over long periods of time, and are primarily based on price data (past and/or present) to predict future movements, then that would prove the weak form of EMH to be incorrect.
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Depends on your definitions, I think. From Wikipedia,
I'm with Wilmott here, for what it's worth.
There's definitely some nonsense in TA, but bundling only the bits you don't like and discarding it as "technical analysis" while leaving in the other stuff as "quantitative analysis" seems like cherrypicking. In any case, no matter what you call their strategy, some firms and individuals have long-run success in intraday trading which is a pretty clear indication that even the weak version of EMH doesn't always hold.
May it be that intraday trayding is profitable because the market is overall bullish? Are they still profitable in a bear market? Or do you have any kind of proof that they are beating the market? To reuse this comparison, in a bull market you can trade with astrology and still make money. Still genuinely asking, I'm seriously interested to know.
I'm not sure of the exact performance of any particular fund or investing house, but the general consensus I've seen is that hedge funds, especially short term ones, typically beat benchmarks during sideways or downward markets, but underperform benchmarks during upswings.
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