Trading

Nowadays everyone (well, at least those whom I know on Facebook or other sites) is trading on the market, be it in stocks, derivatives or currencies, even though these markets have been going down in real terms for the past 12 years. Well, I guess the macro trend doesn't matter as much to traders.

Traders use a lot of technical analysis - charts to be specific. Charts show the action of the market in the past, and traders attempt to observe these trends and apply it in the short-term. When I tell people: "Ah, but you can't even predict what your best friend - one single person - will do in the short term. How would you expect it to work out for a large number of people?" So far I have not gotten a satisfactory answer. It seems to me that traders agree with my statement, but somehow because the charts show the psychology and actions of a large crowd of market participants, therefore it gives some reliability in the measurement of future market actions. The Law of Large Numbers, so to speak.

Casinos also work on the Law of Large Numbers, and they are doing pretty well. But I think there is a fundamental difference here. The law of large numbers work in the favour of casinos because they know the probability of winning or losing each game. They just need to make sure that the probability of a house win is large enough, and then let the law of large numbers play out by itself.

Technical analysis, on the other hand, have no such luxury. Going back to the you-can't-even-predict-what-your-best-friend-will-do example, when you try to extrapolate this error into large numbers, the errors will seem to be pretty massive. If you don't know the probability of what particular action a particular individual will make, how will the law of large numbers work in your favour?

But maybe since most people are using this sort of extrapolation, on a relative basis, they may all 'even' out. It's like a negative and a negative making a positive. Is there such a thing? It's too complicated for my brain to comprehend this. So  as of now, I will stay out trading. :)