Trading Systems and Methods, + Website, 5th Edition

CHAPTER 2

Basic Concepts and Calculations

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

New technology gives us a sense of security. There is data from everywhere in the world at our fingertips, programs that perform sophisticated calculations instantly, and access to anyone at any time.

As Isaac Asimov foretold, 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 and trading platforms making price 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 only when absolutely necessary because they were too complicated and time-consuming to calculate. It ...