Clustering illusion

The problem with manual trading is that we see patterns where they don’t exist. It’s like staring at the clouds. — Jon Kafton

Clustering illusion is one of cognitive biases, the tendency to erroneously overestimate the importance of small runs in small samples of largely random data and underestimate variability (i.e., seeing phantom patterns).

The largest example of clustering illusion in trading and investing is, of course, — a thing called “chartism” — the use of charts of financial data to...