100 Years: Charles Dow to Quants to Predictive Analytics for Everyone

Investors generally reflect human nature in general; they go with the flow and expect the status quo to go on forever.  When news is released people usually overreact, to both good and bad news.  When Bill Gross left PIMCO people started running away from the mutual fund and many others followed.  The opposite is true for stocks like Apple, when Carl Icahn revealed his massive position in the company its stock price shot up.  These patterns are repeated time and time again in the markets but not many investors are able to profit from it. 

This behavior of following the herd puts the majority of investors in a reactionary position, not a proactive one.  When the market starts tilting one way investors have to follow the trend, otherwise they stand to lose a lot of money.  Through predictive analytics investors will have the chance to get ahead of the curve with more regularity. One of the major advantages to predictive analytics trading is that there is always underlying statistics to why each trade was made.  This helps document reasoning as well as predicting even more successfully in the future.  Investors are already incorporating these insights into their idea generation through four questions, is this a good entry point, should we lock in gains at this point, what are some good shorts with low probable upside, how does the market typically react to this type of binary event?  This technology gives investors a little more confidence in their decisions.

This approach has seen its critics though.  Many investors state one cannot rely on analytics because the markets are volatile and behavior erratically and without precise cause.  Predictive analytics is not a new idea; Charles Dow started attempts even 100 years ago.  These old strategies failed because of this market volatility.  The proof of the concept has come in the last 20 years in the form of quantitative analysis and systematic trading strategies.  “Quants employ data scientists and build models to automatically take advantage of predictable market movements, specifically with security prices and recurring patterns of investor behavior.”  Large hedge funds were the first to start using this technology and have been very successful. 

The technology is finally getting to the point where all investors are getting a chance to utilize this technology.  One particularly interesting relationship to watch develop will be that between predictive analytics and high frequency trading.  High frequency trades have the ability to be the spear the leads the market while predictive analytics will have the ability the act before the market reacts.  In reality firms will likely combine the use of high frequency trading and predictive analytics and we might see the 800 pound gorilla in the market grow even larger.  The most promising aspect of this technology is that all investors will be able to access it and will ideally be able to compete, at least in theory, with the 800 pound gorilla.  The tools are finally emerging to enable all investors to profit from incorporating predictive analytics and probabilities into their investment process. 

http://www.wallstreetandtech.com/asset-management/100-years-charles-dow-to-quants-to-predictive-analytics-for-everyone/a/d-id/1316111?