Developing a Trading Model
The stock market can only be understood backwards, but must be practiced forwards! And you need lots of practice.
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Maybe Richard Ney has it right, that the specialists control the markets and that we should do what they do. But how in fact do we learn what they're up to? Doesn't that by itself require a way of seeing what's happening? Correct structuring of the situation dynamics still seems necessary.
It should be obvious that anyone can make a prediction -- anybody! But NOT anyone can actually PREDICT. To be able to predict, there has to be a real unfolding recognizable pattern and you have to be able to SEE the pattern. For example, we can predict what will happen to you if you jump out of an airplane. You can predict it because we have a principle of gravity that says you will fall to the ground. Similarly, we can predict what the market will do if we can see a real unfolding pattern in prices. I try to show you here (using Elliott Wave Theory) that it can work with gold-producing company stocks. (So far, at least, the wave principle has been working.)
Whether you go with Ney, or with Elliott, you still need to keep your wealth where it will do the most good, whether it's in questionable US dollars, Chinese coal stocks, Australian land, Euro bonds, high risk tech stocks, or anything else. You need a guide to make your decisions -- to trade what you currently hold for something else. We need to look to ourselves and apply trading guidelines. A model structures the setting, thereby generating information, and should let you recognize price patterns. The model being hard to find, though, I've been leaning more on traditional price patterns, which themselves can be hard to read, and relying more on Elliott to do the reading.
To help YOU read the charts, I'm focusing on gold and identifying patterns as I see them as we go along, using traditional chart patterns and Elliott wave patterns.
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Let's face it -- things don't ever, or at least seldom, add up nice and neat in a clear model. The real world is far too complex for that to occur. The best we can really hope for is a good working idea or set of ideas.
To find our own way model-wise, and since the specialists' order books aren't available to us, our only option is to study the time series of prices and project the flow of money around the market environment -- like the flow of a tennis ball around the court. In tennis you decide where and how to hit the ball. In the market you decide where and how to put your money. In either event you need principles and mechanisms of behavior to produce good results.
Note that Tushar S Chande believes building a model is essential, whereas J M W Tadion thinks it is practically impossible, and Ney says it plays into the hands of the floor specialists!
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Intermarket Analysis looks at price charts of the world's markets and their interactions. In this age of globalization, it's clear that the markets are interconnected. (The problem is to find the charts and figure out how they interact.)
According to Tadion:
[It] is reasonable to expect that there must certainly be present [in the market] a number of fundamental forces that are responsible for the market's activity, for, by definition, the fundamentals of every process must determine the outcome of that process. But, as far as the market is concerned, things are not as simple as that, for to unravel and identify the multitudes of "fundamentals" that could conceivably influence the market, that is, the market participants, is extremely difficult, and to quantify them and analyze their impact and interaction is much more difficult still.
To try to make the job easier, we might get a jump-start with existing trading formulas, like those of Murray A Ruggiero. Even so, the formulas are only preliminary descriptions.
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One possible way around the modeling difficulties is to generate a representative sample of the markets by selecting securities and reading their charts to recognize tops or bottoms in individual markets -- money moving in or out.
We don't have formulas linking chart attributes quantitatively. At best they'd be implicit -- i.e., hidden in the estimates derived from your reading of the chart data. Implicit or explicit, though, they still have to be viewed against the backdrop of the charts, which, taken together, should let you keep your market orientation.
Charting techniques using traditional theory and wave theory, together with Fibonacci numbers, and indicators could give us a leg up on investing and might be the way to go. So also might be work on neural networks. Nevertheless, all of this could still be just a vain gambit. You still have to "climb the wall of worry" and avoid "falling on the slippery slope of hope."
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