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Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David R. Aronson

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CHAPTER 3

The Scientific Method and Technical Analysis

TA’s central problem is erroneous knowledge. As it is traditionally practiced, much of TA is a body of dogma and myth, founded on faith and anecdote. This is a consequence of the informal, intuitive methods used by its practitioners to discover patterns with predictive power. As a discipline, TA suffers because it is practiced without discipline.

Adopting a rigorous scientific approach would solve this problem. The scientific method is not a cookbook procedure that automates knowledge discovery. Rather it is “a set of methods designed to describe and interpret observed or inferred phenomena, past or present aimed at building a testable body of knowledge open to rejection or confirmation. In other words, (it) is a specific way of analyzing information with the goal of testing claims.”1 This chapter summarizes its logical and philosophical foundations and discusses the implications of its adoption by TA practitioners.

THE MOST IMPORTANT KNOWLEDGE OF ALL: A METHOD TO GET MORE

“Of all the kinds of knowledge that the West has given to the world, the most valuable is the scientific method, a set of procedures for acquiring new knowledge. It was invented by a series of European thinkers from about 1550 to 1700.”2 Compared to informal approaches it is unsurpassed in its ability to separate fact from falsehood. The dramatic increase in our understanding of and control over the natural world over the last 400 years attests to the power ...

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