Frequently Asked Questions

1) Why are empirical market charts of any value?

There is good reason to assume that the amount of fear and greed is similar in comparable market situations – even if underlying situation in the market might be very different. Market behavior seems to repeat itself at similar situations. If the market keeps falling fear sets in and further fall may be emphasized through greed in the form of short selling. However, at some point the markets bounce back – often powered by short covering and new greed towards the upside. Similar reverse mechanisms are known for rising markets. Such patterns can be found when digging into history – independent of the underlying causes for the current market situation.

2) Given the amount of computerized trading, does it make sense to compare today’s markets with the pre-computer era?

It may be questionable. However, computers are programmed by humans and many of the same trading strategies that were used before computers existed are used to program computers today. Therefore we will find many of the same behavioral patterns in today’s highly computer driven markets. The collective market knowledge including past market performance will always stay a basis for trading algorithms. Finally, the people behind the computers are driven by the same desire to make money and to avoid loss.

3) Is it not the case that one can find the same insight as in these charts by just applying standard technical analysis?

Not really. You will find that you may draw similar conclusions but technical analysis is quite subjective and there is no 100% clear definition where to draw support/resistance lines as most of it is based on best-practices. The empirical market charts however, are neutral by definition and they can not be argued with since they only display similar situations from the past. But, if you trade on technical analysis you may find empirical market charts really useful in order to check if the “cup with a handle” work in similar situations or if the rising trend channel kept extending even after 3 months and so forth.

4) It is impossible to predict the future so these historical comparisons will give no clear guidance on market development.

Yes, the future is unknown. Still, every player in the market tries to anticipate it in some way or another. Empirical market charts can not predict the future but they can provide you with relevant information from the past – such as that for instance 70% of similar cases ended higher after 10 days. You may still trade against this historical fact – and win. It still remains a historical fact that in the past 70% of the selected similar developments ended higher.

5) Don’t these charts basically tell us that the stock markets are unpredictable? Many times I just see no clear guidance here.

Small competitive edges can make a huge difference in return when trading is executed with proper money management. In some cases there is no clear guidance in history but sometimes there are situations that show remarkable similar patterns. Trading with this knowledge can sharpen your edge in the market considerably. When for instance “experts” start talking about oversold conditions you can check for yourself and compare with the past with the parameters you believe are important for such an analysis.