After reading Nate Silver’s excellent “The Signal and the Noise” book recently i thought i would illustrate the difficult that technical analyst (or chartists to be more derogatory) have in identifying the real information (signal) from the noise in UK stock markets.
I have taken the FTSE 100 as an example. Below are six prices series. Three of these are 1000 trading days of the FTSE100 in the 1990s, 2000s, and counting back from today. The other three are fakes, and have been generated by simply flipping a coin (actually telling STATA to pick a random series of 1s and Os).
Technical analysis is identifying the signal solely on the basis of past statistical patterns, without consideration for the historical financial characteristics of a company. You can have some sympathy for the difficult task they face in the graphs below, its really difficult to distinguishing the signal (FTSE100 series) from the noise (the fakes or random walks).
Click here to find out which graphs are the FTSE100 and how i used STATA to generate these graphs.