Tuesday, December 25, 2012

Cherry Picking

What is Cherry Picking?
Cherry picking is the act of pointing at individual cases or data that seem to confirm a particular position, while ignoring a significant portion of related cases or data that may contradict that position. [web definition]

Second Opinion
To carefully sort through an offering, looking for opportunity or hidden value.

Traders, specially novices, will often make the mistake of cherry picking some information and assuming that what they have seen will occur again. But, You cannot make valid inferences from one prior case. 

Traders will believe they are smart enough to do what the Second Opinion definition is doing - select gems from a list of offerings. Thus: I have found xyz pattern in the chart of ABC stock. This pattern has given excellent results earlier, therefore I am going to trade it with big stakes. BUT: has the trader looked at other occurrences of the pattern which did not work out? Or, worse, was there only one earlier pattern of this kind? If this is so,  then the pattern has no forecasting ability.

Trading MUST be based on probability. If this has happened a 100 times earlier, was successful 50 times, then there is a 50% probability that the pattern will make money. Our skill lies in maximizing profits and minimizing losses.


Dinesh said...

Dear Sir,
Thanks for your post. I found it very useful.
A trader may also benefit by using Regression Analysis which allows comparison of 2 sets of data to see the dependency of one on the other. The availability of automated tools in the market can help to do the job quickly.

gourv said...

Dear Sir,

I am a nifty trader.I want to know how about trading commodity such as CRUDE,NATURAL GAS,GOLD,SILVER as compared to Stock trading.Does Trading the Index has any advantage over Commodity or same technical analysis can be applied to them as well.Please answer.