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Feedback in Real Life

  
  Education
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FEEDBACKIf market or individual stock a has a positive predictive correlation with market b, and b had a positive predictive correlation with market a, then there is positive feedback, and an explosive growth when a is up would occur. Similarly, if there is a positive predictive correlation, i.e. the serial correlation of a with b say one day forward is 0.2, then market a goes down. If there is a negative predictive correlation of market a with market b, then when a goes up, b will tend to go down, and vice versa, and there will be a stable equilibrium between the two with each pulling the other in opposite directions.

The situation is very similar to what occurs in all feedback circuits in electronics, including what you seen in any kind of amplifiers where there is negative feedback to maintain stability.

What are the markets that have positive predictive correlation with each other, i.e. when a is up today, b tends to go up tomorrow, and when b is up today, a tends to go up tomorrow? There aren’t many. And when such occurs, it is only for a limited time. So you have to be on your toes if you wish to use positive feedback. All this can be quantified with varying degrees of reality and rigor.

Trading Against the Elephant

  
  Education
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Once upon a time, there were six blind men. The blind men wished toknow what an elephant looked like. They took a trip to the forest and with the help of their guide found a tame elephant. The first blind man walked into the broadside of the elephant and bumped his head. He declared that the elephant was like a wall. The second one grabbed the elephant’s tusk and said it felt like a spear. The next blind man felt the trunk of the elephant and was sure that elephants were similar to snakes. The fourth blind man hugged the elephant’s leg and declared the elephant was like a tree. The next one caught the ear and said this is definitely like a fan. The last blind man felt the tail and said this sure feels like a rope. Thus the six blind men all perceived one aspect of the elephant and were each right in their own way, but none of them knew what the whole elephant really looked like.

Oftentimes, the market poses itself as the elephant. There are people who say that predicting the market is like predicting the weather, because you can do well in the short term, but where the market will be in the long run is anybody’s guess. (more…)

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