New Trading Systems and Methods, Fourth Edition

CHAPTER 2

Basic Concepts

Economics is not an exact science: it consists merely of Laws of Probability. The most prudent investor, therefore, is one who pursues only a general course of action which is “normally” right and who avoids acts and policies which are “normally” wrong.

—L.L.B. Angas

After watching Star Trek for so many years, many of us wonder why we still do not have voice communication with computers. While we are still waiting for those advancements, we do not notice that we depend on computers, calculators, cell phones with automatic dialing and infrared reception, and countless other devices to perform tasks that once were done manually. There will come a time when we will no longer know how to do the calculation for long division because miniature, voice-activated computers will be everywhere. We might not even need to be able to add; it will all be done for us. We will just assume that the answer is correct, because computers don't make mistakes.

In a small way this is happening now. Not everyone checks their spreadsheet calculations by hand to be certain they are correct before going further. Nor does everyone print the intermediate results of computer calculations to verify their accuracy. Computers don't make mistakes, but people do.

With computer software making technical analysis easier and more sophisticated, we no longer think of the steps involved in a moving average or linear regression. A few years ago, we looked at the correlation between investments ...