"You want answers ?"
"I want the truth !"
"You can't handle the truth !!"
(Jack Nicholson and Tom Cruise in a A Few Good Men)
Fundamental Analysis Technical Analysis The True Nature of Markets
Strong Trends Exponential Trends Non Trending Markets
Fundamental Analysis
The Truth is that in virtually all financial centres there is a culture of investment decision making based around economics. The logic is simple. Markets are involved with business and economies, therefore the best thing to forecast them with is economics. The logic sounds great but the forecasts and results are often worthless. The economists forecast that GDP will be X for the next quarter. Now, using this "information", which of course is only a forecast, the economist will then "predict" the exchange rate or the level of the Dow, FTSE 100 or Nasdaq over the next 3 to 18 months. In reality we have yet to see any strong correlation between forecast GDP and the actual price level of any stockmarket. I am not suggesting that the direction is not correct sometimes but the forecast prices are pure guesses. In any other business, this level of guesswork would be kicked out in minutes. It is fantasy forecasting and to make it worse, it totally ignores risk management. Economics has its uses and money can be made by using it correctly. Forecasting accurate levels in markets is not one of its strong points though.
One of the main theories used in portfolio management is incorrect. Random Walk Theory states that market movements are random and that there is no serial dependency which would link a market move with a prior move. I have proved that the RWT is not only wrong but the absolute opposite is the real situation. The professors who come to their conclusion of random movement did not know enough about markets to even start testing the relationships that exist within market movements. The data they used was often inaccurate and they based much of their research on closing prices. If you do this you will not find a dependency but that does not mean that there isn't one. Not only is there a dependency between current pricing and past pricing , it drives the vast majority of market moves that you see. Minute upon minute, day upon day and year upon year. Major turning points are often set up months or even years in advance. We will discuss this in more detail a little later.
News, in the main, is the catalyst not the prime driving force. Price history and Time are the prime movers and the market will tell you where it is going. All you have to do is learn how to read the signals, which unfortunately are not always obvious. (Back to Top)
The Truth is that technical analysts are like Jemima. When they are good they are very very good, but when they are bad they are horrid. Technical analysts often change their minds in the same way as economists when it comes to forecasting , but there is a big difference. A good technical analyst will have predicted targets that are accurate and when the dynamics of the market change they will know this very quickly. Again I must emphasis that we are talking about good technical analysts. Far too many technical commentaries are made by unqualified, inexperienced people. This gives a false impression that technical analysis is a weak forecasting tool. It isn't weak, it is incredibly powerful in the right hands. When you have methods like mine, where market moves are mapped out in advance, then the forecasts can become amazingly accurate and of course, profitable. The ability of any type of analyst, technical or fundamental, to make long term predictions to an exact price and date, on a consistent basis, is extremely rare. You do not need to do this to make large profits and also I know it cannot be done often enough to warrant the risk involved. This ability to make exact long term forecasts is often demanded though, by fundamental analysts, when attempting to prove that technical analysis is worthless, even though they cannot achieve this accuracy themselves. The economists' fallback position is that their "science" has institutional acceptance (which is true). Unfortunately the belief that a) the Earth was flat and b) it was at the centre of the universe, also had institutional acceptance for centuries. (Back to Top)
The Truth is that patterns in the markets and the mathematical relationships across multiple time-frames, are self similar (they are fractal). One of the methods I have of forecasting markets is for use over short periods of time and it works extremely well. If we simply change the sampling of the database from 5 minute time periods to sampling periods which contain a complete year's data then we can forecast accurately many years forward. Not theory. Fact. I have forecast the major turning points in the financial market several years in advance. I can teach you rules relating to market movement within 15 minute bar charts in the Bond markets that can be transferred onto long term charts of the Dow and you will see how they forecast the key levels of that market in the 1930s. What is more these levels would have been known years in advance. These relationships have probably always existed (I say probably as I only have the data back to 1900). The Truth is that you can often tell where the market is going, even years in advance. You will know what is slowing down the trend's progress. At which levels it will change direction. At which levels it will start to reverse at to resume the main trend. Not so easy, but still of immense value on a practical basis, is the estimate of how long the move will take. All of this takes the guesswork out the investment and trading strategy. (Back to Top)
Markets that trend do so generally in three ways. They either trend gently, strongly or exponentially. During the techno market bubble, markets trended upwards exponentially and retraced in a strong downtrend, with phases of exponential style declines being shown in the shorter time-frames. Sounds complicated but in reality it means that when you know how to recognise the difference you will know whether it is safe to buck the trend or not. I can show you how to spot the difference in seconds. So if you had a strongly trending market should you buck the trend? On average it is a dangerous strategy but we don't have to deal on average. We deal in specific situations. Let us take a scenario. A market (any market) has opened lower with the overall trend down. Let us say that it has an average daily movement of 100 points. The market has fallen 55 points and just to make it easy for you, we will presume that it will fall almost 140 points during the day. This is a dangerous market to buy into. Except that we could show you not only the price where it would be safer to buy, but also the length of time that it would be safe to hold the position for. Not only that you would also know the most likely maximum profit that you would make in advance. Not possible? Trust me, it happens nearly every day in trending markets. Here is an actual example. The DAX was falling sharply and it had a bounce of 26 points in one hour. I knew that we had a maximum profit potential of around 32 points, a very low risk of losing money and exactly one hour to take the profit. At the end of one hour we had to be out of the long positions and short again. After one hour the market peaked (we had not forecast a move of exactly one hour but we did know we had a maximum of one hour), and it never managed to go even one tick higher. It then fell 35 points in the next hour. All this was graphically displayed on the screen, showing clearly where your risk was increasing and decreasing. Remember, markets are fractal in nature. That means that if we can do this on an hourly basis we can also do it on a daily, weekly or monthly basis. We would know the best levels to trade with the trend or trade against it. On one counter trend trade we had five days where it was safer to be long of the Dow in what had been up to then a sharply falling market. We saw a 1,000 point move in our favour within three days. How much risk did we take? Just over 10 points. We were in profit within a couple of minutes. (Back to Top)
The Truth is that markets that go straight up or down are not out of control or plunging in freefall. They are working within normal but rarely seen market limits. They show similar characteristics to aircraft as they go through the sound barrier. An initial "Boom !" and the resistance they experienced just vanishes. The normal laws that apply to support and resistance change dramatically and quantitative analysts will die horribly (I know this for a fact as I used to be an Assistant Director of a City quant team). This was one of the problems with Long Term Capital Management. Nobel prize winners trading markets. While they may well have applied the rules of statistics to their positions, they never took into account the way that certain physical laws invert under rare conditions. Everything that they thought was acting in their favour was actually doing the opposite. I can show you how you recognise and take full advantage of this market phenomena.(2008 update) You will know what I mean by these trends by just looking at the moves we have seen in Gold and Oil since early 2007. The sub-prime banking crisis has also shown you the extremely limited value of traditional quantitative models, something I, and a few others, have been warning about for years. (Back to Top)
The Truth is that these are the cash machines of the markets. Once you learn how to identify the tops and bottoms of the ranges, the profits will flow. Only one small problem and that is these levels keep moving. Fortunately we understand why they do that and how you measure it in advance. At the beginning of September 2001, just before the WTC terrorist attack, we had signals that a fall in the Dow 30 was about to take place and also that we had a target of at least 1,000 points below its current price of 10,000. Just before this we had seen a market where selling rallies and buying dips had been the best strategy. If you had continued to do this, after our signal, you would probably have been long when the attack took place and the market was closed for four days. You need to know when the market dynamics are changing, otherwise the consequences can be financially very painful. Just ask the Nobel prize winners who were losing $1,000,000,000 per day in 1998.