FOREX QUANT

November 26, 2007

Prediction is Nonsense

Filed under: Uncategorized — by TraderMade @ 6:59 pm
Tags: , , ,


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Thanks to R who consistently posts useful articles in his journal. This time he posted a link to an article at the economist.com. The most interesting thing for me in that article is these paragraphs. It is stated that,

To show how this works, Messrs Frydman and Goldberg examine the PERSISTENT failure of economists to predict movements in the currency markets. According to Kenneth Rogoff, an economist at Harvard who has long attempted to find rational models for predicting currency fluctuations, “it is stunning how hard it is to explain movements in exchange rates.”

All the models based on rational expectations now say that, on fundamentals, the euro is overvalued against the dollar, he reckons. But does that mean the dollar will soon rise? Mr Rogoff says he has no idea.

In rational-expectations theory, a range of variables including inflation, interest rates and growth should have a predictable impact on currency movements, but in practice this theory has proved less useful for forecasting than tossing a coin. Among rational economists, the debate is over “whether the glass is 5% full or 95% empty,” he says. Only over longer periods—say two to four years—is there any evidence of exchange-rate predictability, which is far too long to be useful to traders or policymakers.

So, isn’t it clear now.. just stop predicting.
Develop a trading model. Not a prediction model.

(*)

2 Comments »

  1. Nice blog Pak Darma. I hope you will treat me an ice cream for this. I wonder what is the most effective trading plan that makes money. Care to share? Thanks. Lucia, Medan.

    Comment by Lucia — November 26, 2007 @ 11:49 pm |Reply

  2. Thanks, Bu Lucia.
    Yes i owe you an ice cream ya.. he he🙂
    regarding the trading plan, it depends on what market, what timeframe, what risk-acceptance level, etc. and each trader wud fit into some particular style too.🙂

    Comment by darma — November 27, 2007 @ 1:22 am |Reply


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