Another Way to be Fooled by Randomness (Part 1)

I have recently been catching up with blog ideas that, at one point or another, struck me as particularly noteworthy. Today’s installment is but a snippet that offers some relevant material for us hopeful traders. Today’s post was inspired by some writing from January 2014:

> Quite often I have read technically-based
> trading strategies that advertise quite well.
> Do they really work, though? Certainly we’re
> brainwashed to think they work (technical
> analysis books, educational seminars, etc.),
> but in trading many things work just by
> random luck alone (like 95% of all cash
> secured puts over the last two years).
>
> Ultimately, I believe the only way to
> determine if a trading idea has merit
> is to put it through the exhaustive steps
> of trading system development. Most people
> don’t know a thing about this so they feel
> comfortable trading in a discretionary
> manner until they experience a catastrophic
> loss that knocks them out of the game or
> leaves them walking quietly into the night
> with tail between their legs.
>
> Admittedly, some things are difficult/impossible
> to backtest. As an example, perhaps I might
> look at S&P 500 stocks in the upper half of
> their Bollinger Bands vs. those in the lower
> half and look at the distribution of price
> changes over the following days to see if
> there’s a difference. If I can’t make a
> statistical determination then I may wonder
> “am I confident trading this idea even though
> I have no more reason to think it works than
> randomness alone?”
>
> If I am then great! If not then I won’t.
>
> Bottom line: I should be honest with myself
> when trading an idea that I have no more
> reason to believe works than randomness alone.
> I think many traders are deluded into thinking
> they know something works based on definitive
> principle when they actually have no good
> reason to believe it at all.