The Texas Sharpshooter Fallacy
When to Read a Pattern and When to Ignore
This is a good one for traders…
The Texas sharpshooter fallacy.
Defined as “Interpreting patterns in random data where none exists”. Hmmm, now why does that ring a bell!? Charts? Price?
How often do we add significance to a small section of a chart when it’s really just random?
It’s an easy trap to fall into – as humans, we want patterns and symmetry to things and we’ll often see it when it’s not there. Just like the Texan who shot a bunch of times at a barn and then drew bullseyes around the shots to claim he was a sharpshooter. (The Texas sharpshooter fallacy). If we are not careful as traders, we can do that with our charts…
Finding patterns in bars or candles that really are just random.
Today, think about your charting process.
Are you drawing random lines with no significance or is there a real edge to the pattern?
Examples could be:
- Price wicking through the prior day’s low. Arguably a solid repeatable pattern. Price breaks, triggers stops, selling shuts off, and we rotate back higher.
- A minor level of support in a range. Arguably a useless pattern. Price has to stop somewhere and just because it’s held for a few bars at a level doesn’t necessarily mean that’s an edge.
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Statistics of Different Chart Patterns
If you want to dig into the stats around chart patterns take a look at this website. It’s tough to navigate and the ads are annoying but it does have some interesting info. (Thanks to Peter for finding this).