Let's says i have 10 years of daily prices on a stock ABC. I do some analysis and I realise that, for example, if the stock increases 5 days in a row (close > open), 75% of the time, the 6th day will be a decrease. From that :
- If we compare with throwing a coin, if i have 5 consecutive tails, the probability to have a 6th tail is still 1/2 right ? So knowing that i have 5 days of increasing price, i still have 1/2 chance that the price going up or down because price are random walk ?
- Is the bias to think that those 75% will continue in the future and then i can't just say i have a strategy with 0,75 hit ratio ? How can i logically prove that this strategy is pure luck ?
- Now imagine that i look closer and i see that on those 75% cases, there is several groups of 3 or 4 cases each where it happens for the same price, as if there were some "resistance". I don't really give any interest to technical analysis, however is it possible that the probability space changes and it's not 1/2 of chance going down when it "hits" this resistance price in the 75% case ?