Can Past Data Be Used To Predict The Future?
This is a ridiculous question that I get all the time regarding technical analysis. I really don't understand why.
The simple answer: What other information do we have?
I mean, let's be serious. If we had information from the future, it would be incredible. Could you imagine? That would be some Back to the Future Part II type stuff. In the movie, Michael J. Fox traveled to 2015 and bought the Grays Sports Almanac planning to take it back to 1985 to bet on sporting events. And sure, if you could figure out a way to get some information that is not from the past, and somehow from the future, sign me up for that newsletter please.
For a more formal answer to this question, I'll pass the mic to legendary technician John Murphy:
"....the validity of using past data to predict the future. It is surprising how often critics of the technical approach bring up this point because every known method of forecasting, from weather predicting to fundamental analysis, is based completely on the study of past data. What other kind of data is there to work with?
The field of statistics makes a distinction between descriptive statistics and inductive statistics. Descriptive statistics refers to the graphical presentation of data, such as the price data on a standard bar chart. Inductive statistics refers to generalizations, predictions, or extrapolations that are inferred from that data. Therefore, the price chart itself comes under the heading of the descriptive, while the analysis technicians perform on that price data falls into the realm of the inductive.
As one statistical text puts it, 'The first step in forecasting the business or economic future consists, thus, of gather observations from the past.' (Freund and Williams) Chart analysis is just another form of time series analysis, based on a study of the past, which is exactly what is done in all forms of time series analysis. The only type of data anyone has to go on is past data. We can only estimate the future by projecting past experiences into that future.
So it seems that the use of past price data to predict the future in technical analysis is grounded in sound statistical concepts. If anyone were to seriously question this aspect of technical forecasting, he or she would have to also question the validity of every other form of forecasting based on historical data, which includes all economic and fundamental analysis."
Could not have said it better myself
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