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RTs,
I have noted several threads of discussion with a central theme regarding
whether markets are random as proposed by Efficient Market Theory or if
they are deterministic to some extent. I have written a paper describing
the evolution in thought that is occuring as a result of the application of
non linear, dynamic models (widely known as chaos theory) to market
movement. The paper is too long to post here but the introductory text is
given below.
The conclusion is that markets exhibit dependencies in the short term which
do render them to be forecastable over the short term. Ralph Ancampora has
even indicated that some of the most prestigious business schools wiil soon
be teaching market timing techniques to their students.
I argue that pursuing a short term trading startegy , based on an accurate
forecasting methodology, and compounding the results of many small profits
will consistently beat the results of any buy and hold strategy.
Here is the intro:
Over the past 30 years the development of the science of chaos and its
application to capital markets has succeeded in challenging the fundamental
assumptions underlying the mainstream capital market theories. By viewing
markets as fractal processes guided by nonlinear functions, it repudiates
the random walk hypothesis and builds a model of market structure much more
like that observed in reality. In this model short term dependencies can
occur wherein an impulse affecting market direction is forecastable over
the near term but quickly loses it's influence as it decays in strength or
is overcome by another impulse. The resulting structure resembles cyclical
action with irregular periods and amplitudes.
Drawing on the logical extension of these advanced concepts of price
movement, the author has developed a short term stock trading methodology
which provides far greater returns than have been realized by the
application of traditional investment strategies and at comparably lower
risk.
This paper traces the evolution of thought about market dynamics occurring
today and links it to a short term model of price movement which underlies
the author's stock trading methodology. By developing a quantifiable
definition of risk relative to price movement and by trading the fractal
nature of price movement, the author explains how risk of capital loss is
minimized and return on capital maximized by the short term strategy.
Next, the paper identifies the essential elements of the stock trading
system necessary to realize the extraordinary return potential of the
methodology and validates the proprietary components of the system.
Finally, the paper presents data documenting the hypothetical and actual
performance of the system since 1994.
Jim White
PIVOT Research & Trading Inc.
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