Fundamental traders have no extra time for the technical traders, and technical traders battle with the Efficient Market rabble, who constitute the vast majority of market theoreticians, for coherent interpretation of the unruly and unpredictable beast we refer to as “the market”. Of course, reams of academically-sound market studies proclaim the inherent correctness of the Efficient Market Theory. Why…no less than the eminent Dr. Burton Malkiel trumpets the sheer futility in considering anything short of Efficient Market Theory. No, one cannot argue with facts laid bare in slick PowerPoint presentations with glossy charts and multi-colored tables, that’s for sure, and yet there is something missing, something so essentially important that no theorist dare utter the words...equity market theory seldom translates into profitable trading.
And that’s a real problem for me. If a market theory is irrefutably true on paper it ought to have some phenomenal performance in practice. Of course, this is seldom the case.
For those who might have missed it, we’ve put a team of astronauts on the moon. We have unravelled the the vagaries of the quantum mechanics with startling accuracy, and teased the destructive power of atomic structure to produce enough nuclear weapons to obliterate ourselves tenfold. Why, we have even sequenced the double helix structure of of our own DNA
molecule. We are talking about the very building block upon which life is based, a structure so complex that literally billions, not millions, but billions of gene strands comprise it’s makeup.
But we have failed miserably at predicting where the market is going to move at a given point in time.
Yet we argue on as to who is right and who is wrong. It seems to me that I learned in my college Argumentation class that something true at face value, and provide proofs to that end, before you can argue your point. So it would seem a bit imprudent to argue about which theory holds true when we have proven to ourselves, over and over, that no theory has predicted, with any accuracy, where the market is going to be at a given point in time.
My one-watt brain cell demands that a FACT has to hold up time after time to be true. One cannot argue the untrue into truth. For example, these are facts:
- 1+1=2 (unless you’ve digested Liebnitz’s arguments)
- The moon revolves around the earth in a given arc and is not made out of cheese.
- George Bush is the President of the United States.
- We will all die
I think you get my point here. It is impossible to argue untruth into truth through a sheer volume of words. So I’ve managed in 21 years of trading at the institutional and retail level to establish only one irrefutable FACT
- We have an incomplete knowledge base about the market and there is not a method to predict, with 100% accuracy, what the market is going to be valued at a given point in time.
Which leaves me out there with the lunatic fringe scratching my head in bewilderment. Yet I am a consistently profitable trader. I live in the very uncertain world of fractals, strange attractors and chaos theory. Yes, you heard me say it….CHAOS THEORY
The real problem with all market theories, in my opinion. is that they are linear in nature. Of course, even a cursory observation of any equity chart exposes the distinct non-linear pattern typical of the equity markets. It is not possible to predict even from bar to bar where he market is headed. No, a binary outcome is after each bar is the best you can hope for. That is to say there is a probability from bar to bar whether the market will go up or down or stay the same. And when trading, probabilities are the best we can hope for…and careful observation of market fractal mini-structures can be teased from the charts. Which is not to say that fractal structures are the Holy Grail in trading, but they are reliable predictors in non-dynamic markets….that is, markets unaffected by catastrophic or peculiar outside occurrences.
Of course, this type of thinking turns the world inside out….after all, we linear thinkers and are programmed to see patterns in the world and formulate patterns based upon observation. I am 5’7″ and weight 210 pounds and have gray hair. My boss is also 5’7″ and weighs 210 pounds, and yes…he has gray hair. So it stands to reason that 5’7″ and 210 pound men must all have gray hair. Of course, that is a simplistic view of our linear thinking process, but it serves it’s purpose well enough…and that is correlating variables of an infinite set is, at best, a dicey endeavor.
No, I’ve learned that the secret to the market lies in thinking in a non-linear fashion, and blocking out what seem to be obvious correlations. There are no obvious correlations in a non linear world….only fractals. Are you with me?
