|
PureBytes Links
Trading Reference Links
|
Gabe:
I don't want to rain on your parade. I know very talented market professionals
that spend their time arguing the points you have made. They are interesting
points made by thoughtful and very intelligent people.
I was educated at the University of Chicago. I began in the physics and math
department and ended up a graduate student in Economics. I've heard all of these
arguments before. In the mathematics department, the statistics classes and the
economics department, we again and again were taught that the market is random
and that the use of indicators and 'drawing techniques' [chart formations, trend
lines, etc.] are not market predictors and therefore, are useless.
I have news for all of the instructors that made these claims, and I'll relay it
to you now. Just because you argue they don't work, does not mean they do not
work. In my personal experience, they work. My work uses the oldest method of
validation: My bank account. I've been a professional trader for nearly years
now. I use trading tools that you might classify as useless.
I've heard very eloquent arguments here, pro and con, about indicators. Some of
these arguments have been made by some of the people I respect in this
marketplace. I still respect them and their views. But I'll keep my own views,
thank you. I'm more than happy with the results of my techniques. I have no
interest in 'proving' that my approach is better than anyone else's. In fact, if
someone here makes more money than I do, to me, that's a good thing. I wish no
one ill tidings.
Very early in my trading career, a friend took me a few blocks down Wells street
in Chicago to meet a fellow that had a one room cubbyhole office. This fellow
had a tiny quote screen [an old Marketview] and a huge drafting board where he
was busily drawing away. This man was a 'slave' to his own methodology [to this
day, I have never seen anyone else use or apply these methods]. He was a very
nice fellow, very quiet and when the market slowed a bit, he asked me what I
used to 'figure' my trades. I told him briefly, and then he began to tell me
what he used.
He was updating an IMM swiss franc chart and he had kept hand drawn charts of
the swiss hourly charts for a few years [remember, the IMM currencies hadn't
been trading that long back then]. He told me that he was expecting a major buy
in the swiss franc that day, and then showed me his chart. He pointed and told
me where it had to go to make his buy level 'valid.' I watched as the swiss
franc ticked to within two IMM ticks of his price and then it reversed its down
moves and began heading up in a rush. I asked him if he had bought any swiss
when it approached his 'perfect' buying level. He replied that he would only buy
swiss francs at that one level--to buy at any other level would 'negate' the
trade. By the time I left that office that day, the swiss franc had traveled
over 100 IMM ticks higher from the level it touched, and still the man kept
updating his hand charts.
On the way back to our trading room, I told my friend that I thought that man
was not going to be around as a trader much longer, since he clearly couldn't
'pull the trigger' on the trades he anticipated. My friend laughed and told me
the old man had been around a long time and then he changed the subject.
I ran into that old trader about ten years later. I was managing money in an
offshore fund and he made an appointment with one of my money sources to meet
me. When I walked into the room and saw him, he showed no surprise and did not
let on that he knew me. At the end of the presentation, he ended up making a
very large investment in my offshore fund. He asked me to dinner and we spent
that night speaking about the recent market moves. At one point I asked him why
he invested money with me that afternoon and he told me that he knew I was very
successful at trading currencies and though he had watched them closely for many
years, he was not comfortable trading them--they did not move to his rhythm. I
reminded him of the swiss franc chart he had been updating that day in his
office, and he smiled and told me the price of the entry level he had been
waiting for that day. He told me it had not reached his level that afternoon, or
the rest of the year, since the swiss franc rallied nearly a thousand IMM points
from that price.
I asked a friend that ran a local bank about the old gentleman and got a
surprising reply: He was a major stockholder in a huge local company [well over
$300 million] and his local real estate holdings were worth even more. I asked
what the man did for a living and my friend told me he made his living 'trading
commodities.' Over the years, this old gentleman has given me countless letters,
papers and hand written manuscripts [all written from the late 1800's to just
about the end of WWII] that he collected from his correspondence with other
successful traders that he knew [The equivalent of today's newsgroups on
trading, I suppose]. He did not like the 'new' approaches to trading
[mathematics based and/or computer derived] or the new 'fake' commodities being
traded ['Nationalized debt' and 'Stock baskets'].
Every time I read someone make these points that 'indicators don't work' or
chart formations are statistically invalid, I shake my head. To the people
performing those tests and making those points, they may be useless. But if a
trader can use them and use them to make money, does it matter what someone
else's statistics say? Remember, the world was thought flat for many centuries
and the galaxies revolved around the earth. Are we too 'sophisticated' and
knowledgeable now to make those errors in 'truth?' Perhaps acupuncture is just
mumbo jumbo that has been used for well over 2000 years in China. Or perhaps it
produces its effects by manipulating something that we don't yet understand, as
a recent set of studies in the US by several physicists reported.
I'll end this long post by revealing that I don't use indicators in my
trading--I haven't found any that I 'trust.' That doesn't mean I don't look at
them as others show me how they use them. Nor does it mean I doubt that others
make money using indicators. I keep refining my own techniques, adding a bit
here and there. One man's random walk may be another man's indicator. They are
only tools--and if you gave a wrench to a cave man, I doubt he would use it as
you do now.
Best,
Tim Morge
Gabe Hanover wrote:
>
> I would like to expand the discussion regarding indicators. In addition
> to the problem of lag, there is a more fundamental problem. There is a
> philosophical argument which I think is applicable here: You can not
> predict A with A.
>
> For example, take the syllogism: All beagles have brown eyes. Bob has
> brown eyes, Therefore, Bob is a beagle. What went wrong? We are using
> beagles to predict beagles. This is a logical fallacy. Likewise, prices
> and indicators based on prices, contain no inherent predictive
> information and cannot be used a price predictors. Why do they seem to
> work? Two reasons are: 1) They can identify, but not predict the future
> of trends; and, 2) When a sufficient proportion of market players act
> according to a favored indicator, it becomes a self fulfilling prophecy.
> While, I'm sure you can think of additional reasons, I would argue that
> none of them support the argument that indicators are valid price
> predictors.
>
> Where does that leave us? If you were fortunate enough to take
> Statistics 101, you know that multi-linear regression analysis is
> perhaps the best tool for predicting A. It does not use A to predict A,
> but rather, it uses independent variables b, c, d, e. etc. For us, this
> means using indexes, market statistics, sentiment indicators, interest
> rates, another stock, future or group and any other independent numeric
> indicator to predict the future of A, except A itself.
>
> Does anybody doubt this? Am I going over old territory?
|