Is correlation enough to trade with?

[easyrider2]

So many responses and everyone misses the point. It doesn't matter if you can identify the causation as long as you can find a correlation that has enough signficance to trade. Obviously a sample size of 6 is much different than 60 or 600.

I'll trade a black box any day, as long as I have enough data to fully evaluate significance, robustness, risk vs. volatility, etc.

Of the thousands of posts I've read on ET, from tired old cliche that no one actually tests; to blind guru faith thrown at ppl like LBR whose great strategies sell books but have never tested to show an edge (and many a quant have tried variations of her ideas); to all this psyco-babble talk about psychology.

This game is very simple.

1. Find an edge.
2. Trade it with % of bankroll to satisfy your risk criteria (e.g. usually 1-2% risk per trade)

Compound that edge and live the good life in a few years.

 

[harrytrader]

Bwwwwwwwwwaaaaaaaaaaahhhhhhhhhhhh the kind of thread I feel like to make a long answer so I will prevent from doing it maybe this week end rather

Quote from dnaj65000:

I got into a philosophical debate with a Microbiology undergraduate friend of mine over beers tonite. The topic was, is it enough to base (life/trading) decisions on knowing the correlation without knowing the causation or reason why something happens?

example: Who wins the Superbowl has a high correlation that it will either be a bull market or bear market. I say that is good enough reason to bias long or short for the year.

example: In roulette, a table will typically show either Red or Black being landed on 52% of the time. I say the odds are in your favor to bet the color that is showing up 52% of the time that night.

example: The only 4 women that ever showed any interest in me are all Scorpios. My ex-g/f is a Scorpio. High correlation.

hypothetical example: scientists find the underlying DNA strand that is the cause for cancer however have not found a cure yet. A herb that was found in the Amazon, when ingested showed a 70% chance of reversing tumorous cells. Is that enough reason to use the herb for cancer?

His argument is that I need to know the reason why things happen so that I can make a good judgment in the future. He says by knowing the reason, you can rationalize what your decision is. I don't understand why a reason is necessary because it doesn't change the outcome.

Technical Analysis is based 100% on finding correlations. If the market does this, then it is likely to then do this. We do not know the underlying reason why it happens, other than supply and demand, so is just having correlation without reason enough to trade with? If someone proved to me that 75% of the time if the price crosses a certain line, and I take a long/short position, it will make me money...I would do it without asking why. IMO, people who ask "why" and are searching for "reasons" are the people who like to listen to CNBC and analysts explain why a certain stock went up. Knowing a reason does not change the price.

I welcome any thoughts