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This all comes down to:
A) Are you smart and do you believe in technical and behavioral analysis
-or-
B) Do you want to wait for Abby Cohen to change her mind at the bottom?
The markets are ultimately driven by fundamentals. But, crowds act
similarly and have acted similarly throughout human history to similar
stimuli. This is predictable to a large degree. Whether you use Walt's
fear index, Elliott Wave Theory, Gann, classical technicals or some
combination of it all, this is the only analysis that predicts the
market. The market is social. Traders are social. You cannot predict
what I will do, or what Walt will do, but you can, with some degree of
probability, forecast what the group will do.
One other thing, even if everybody believed in this sort of analysis
(and most of the idiots out there do not), it still would work!
Walt Downs wrote:
>
> Hi Andy,
>
> As you have stated, it is not possible to calculate how
> any one person will react in a given situation. The
> response will be a matter of how that person has been
> "hardwired" based on upbringing and social circumstances
> ....etc.
>
> However, this changes once you start addressing a group as
> a whole in a crowd environment. The actions of a crowd CAN
> be calculated. How can emotion be measured in a market
> environment? Simple enough. Volatility, volume and many
> other factors can be utilized in the measurement process.
> Mind you Andy we aren't just talking here about what the
> emotional traders will be doing. we also need to calculate
> what the smart traders will be doing. The process then
> becomes one of understanding the factors that will affect
> the crowd. Given that a crowd will react in accordance with
> its strongest single element (For this purpose, this can be
> said to be smart traders who use the current market situation
> to start the market rolling in a certain direction) once again
> we are dealing with something that can be quantified.
>
> It isn't enough to think mathematically, you also have to think
> *logically*. My premise for the Fear levels was that highs and
> lows hold more emotional impact to a trader than any other portion
> of the bar. O.k. lets think about that logically for a second:
>
> 1. Would you argue that a high and a low is not an extreme?
> 2. The last time you held a position, and the market showed a
> huge expansion bar in your favor, and that bar closed on its
> extreme, how did that make you feel? Do you think you will
> remember that feeling? Would you have felt as good if that
> bar had given back half of your profits and closed in the
> middle of the range?
>
> Addressing human memory, this can *definetely* be measured.
> the averages for the passage of short-term thought to long-
> term memory running in increments of 3 minutes, 3 hours, 3
> days, 3 weeks ....etc.
>
> O.k., we have a theory here, so let's put the two together. Memory
> and extreme. Now we will test to see if the market shows statistically
> valid increases in factors such as volatilty and volume when price
> is within " n " distance of the levels. Next, we can compare the
> same factors when price is greater than " n " distance from the
> levels. My tests show a statistically valid difference. Ergo it
> is my belief that the hypothesis is valid. (MULTIPLE market testing
> by the way...).
>
> Of course, we could be talking semantics too. If you feel more
> comfortable referring to such as "consolidation of mass" then
> so be it.
>
> You mentioned testing? The indicators work because they *can* be
> tested. They don't work because *I* say they work. They work
> because the *market* proves or disproves the hypothesis each and
> every time the indicators and levels are tested.
>
> Incidentally, a theory doesn't have to be correct 100% of the time
> in order to be valid. Matter of fact scientists will tell you that
> any theory worth its salt runs the risk of being proven invalid
> every time it is tested.
>
> Use *logic* to theorize Andy. Use mathematics to *test*. If we were
> to follow your parameters then would we not see a market environment
> best described by pristine examples of price within standard deviation?
>
> Respectfully, I can't see that anything you have said has refuted
> either the logical statements or the mathematical premises upon
> which the levels were built and tested.
>
> By the way, the levels *were* blind tested by an independent party.
> This party constructed systems of his own design based only on the
> levels as inputs. The comment of this individual was "Never have I seen
> anything remain so consistently profitable accross such a wide array of
> markets with no tweaking".
>
> The levels aren't a holy grail, but they work consistently, and they
> contain certain traits that at times can only be explained by the
> hypotheses as stated.
>
> Regards,
> Walt
>
> Andy Dunn wrote:
> >
> > I've got to disagree once again Walt.
> >
> > 1. I think your indicators are excellent
> > 2. I think they have nothing to do with human emotions
> >
> > How do you know what every trader is thinking of at all times?
> > Did you interview every trader that day to see if they were scared or greedy feeling?
> > There are millions of traders and they are thinking on a million different things...and many "market wizards" say they never let emotion into the equation since they trade mathematically. If a person trades "purely mechanically"...then he cannot even become "scared" or "greedy"
> >
> > It is impossible to even test such a hypothesis
> >
> > "believe in science, math, and double-blind studies"
> > --me
> >
> > http://www.skeptic.com/
> > http://www.csicop.org/
> >
> > *********** REPLY SEPARATOR ***********
> >
> > On 10/8/98, at 9:03 AM, Walt Downs wrote:
> >
> > >Hi all,
> > >
> > >Perhaps this chart of the Yen will reinforce what I have been
> > >saying about the Fear levels and Fear hybrids like the Fear
> > >Index. The point is that people who say that emotions cannot
> > >be quantified in the markets are wrong.
> > >
> > >"Free your mind, and the rest will follow..."
> > > ---anonymous
> > >
> > >Regards,
> > >Walt Downs
> > >CIS Trading
> > >http://cistrader.com
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