CHAPTER 2

Is It All Just Random?

According to many academics, technical analysis is a pure waste of time. Price, they claim, is absolutely random. Using patterns and indicators to predict its behavior is no different and no less primitive than reading entrails of a dead animal in order to divine your future. One of the favorite tricks of the pure randomness crowd is to have the random function in Microsoft Excel generate a series of numbers and then plot it on a graph. Admittedly, when many technically oriented traders are confronted with a seemingly nice chart pattern only to be told later that it's all random, they experience a loss of confidence. Is it all a ruse? Is technical analysis useless? Are we hopelessly wasting our time trying to learn its precepts? No, no, and no.

Price patterns are no more random than all human behavior—that is to say, they can be quite accurately predicted in general but quite often miss in the specific. Let's play the following game. Your job is to observe a wealthy Upper East Side businessman (for fun we'll assume that he always wears a dark blue pin-striped suit and yellow polka-dotted tie and is known to all as Mr. X) as he leaves his Park Avenue penthouse to walk 20 blocks to his high-rise office in the famous Met Life Insurance building. If you can accurately predict when he will appear in the door of his apartment building you win $1,000. If you are wrong you lose $1,000. What do you think your chances of winning would be if you simply had ...

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