KDnuggets : News : 2007 : n22 : item23 < PREVIOUS | NEXT >


Subject: Data Mining the Financial Markets, Part 1

b-eye-network, by Thomas A. Rathburn, November 6, 2007

In the annals of the various gold rushes, the vast majority of miners made misguided efforts at claiming the potential riches at stake. Many of these individuals exhausted their savings -- and spent a significant portion of their lives -- in a fruitless search.

Some miners managed to earn a respectable living, their efforts guided by directed search. They applied this personal knowledge to extract what their claims had to offer.

A few moved beyond the noise of misinformation and identified truly useful knowledge. These few individuals are the stuff of legend.

The financial markets attract the talents of a wide variety of analysts who attempt to utilize any and all techniques to carve out an advantage that will lead to fame and fortune. The market also attracts individuals naive or foolish enough to expect to stumble across, or be given, the keys to the financial kingdom.

The financial markets have been successfully mined using a variety of techniques. The successful efforts require either hard work or extreme luck. Many who are successful will speak only in general terms about their approach. This is attributed to the value of the nuggets of information they have mined. Information is a diminishing resource. The more it is shared, the less value it has.

Speaking in general terms helps to avoid misunderstandings and unrealistic expectations as well. For example, one of the techniques employed by the author yielded a $40,000 per contract profit in the first half of 1996. Trading one contract required a $2,500 margin account.

At first glance, this result seems exceptional. A more complete examination would reveal that the author’s personal money management rules required $25,000 to $50,000 in the margin account to trade one contract. While this would not necessarily be required of other traders, it is a more accurate picture of the author’s trading environment.

Applying the same technique to the same market in the first half of 1995 yielded a $7,500 profit per contract. While still profitable, this result points out the variance of performance in different time frames. The author would not be surprised by experiencing a loss in some six-month period using exactly the same technique.

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KDnuggets : News : 2007 : n22 : item23 < PREVIOUS | NEXT >

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