I've noticed that some traders seem to use methods based on the irrational or esoteric. Perry Kaufman's classic "New Trading Systems and Methods" contains a serious chapter about astrological indicators. Some also believe in Elliott waves, Fibonacci numbers, Gann lines, and there are even experts and books about trading with them, although there is no rational explanation how those phenomena could affect asset prices or trade results. If you ask someone why he's using an irrational method, you normally get the response "because it works". Does anyone know of an objective, quantitative study of trade results by astrology, Elliott waves, Fibonacci numbers, or Gann lines - aside from anecdotal evidence?
You're young and you started posting by recounting your limited performance (in your terms). The CW generally rules in what survives here. A complaint can eliminate a quality comment or a person surviving being listed on some list. Historically, there was a time when contributions were known to have work behind them. Somehow you missed out on the fact that quantitative studies only let CW survive. Most are inductive as a matter of fact. What does it mean to you (this is a question to you) if some method or approach has its author's name attached to it? I'm asking just for argument's sake and NOT because I will associate your answer with your name. Last Q. Do you know what a clock is? What does the slowest hand indicate? Are there slower market fractals?
I did a study of the trade results of someone using Elliott Wave over a 5 year period and found that he actually had positive expectancy. I also read a Credit Suisse paper analyzing a number of different technical approaches, including Fibonacci, which they did not find useful. Haven't seen any hard studies on Gann, but someone I respect said it was not very useful because it contained too many ambiguities. Just from the little I've looked at it, I don't need to see any more. But, I have to ask what you would consider a "rational explanation"? I can see how astrology would fail to reach the level of "rational", but Elliott Wave (or, more broadly, any wave-based approach) states that "mass psychology" is responsible for asset price movement. Is "mass psychology" a "rational explanation" in your assessment? I think on some level even Soros' "reflexivity" is based on "mass psychology", so it isn't just amateurs counting e-waves who look at the market from that perspective. There was a paper at CXO Advisory on "The persistence of diverse trader beliefs" or something very similar, which delved into this topic of why certain beliefs that seem so far outside the mainstream can persist. I recall the author's basic conclusion was that there was probably some kind of evolutionary background to this phenomenon. Frankly, I would say that the role of biology and especially neurobiology, is poorly understood at this point and while I wouldn't want to make it a "catch-all" explanation, a lot of things that seem "superstitious" and "irrational" probably do have their basis in biology. If you think about it, what other basis could they have?
Your study about the Elliott Wave trading, was this only one person? How high was his expectancy? Did the study only include trades that followed some objective Elliott wave criteria, or all trades of the participants? Yes, I'd say mass psychology would be a rational explanation, but I do not see the mass psychology explanation of Elliott Waves. How would mass psychology explain a certain number of waves in a falling or rising trend?
Yes, that was just me studying one person. His expectancy was around 40% using just Elliott Wave. He and I became collaborators for a while. The reason I only studied his track record was because I could not find anyone else who even came close to being successful with Elliott Wave, so I knew it would be a waste of time to study others, at least among those I came into contact with. In the end, I agree with Aronson's judgment that Elliott Wave is pseudo-science. That said, I would argue that Elliott Wave can be a powerful tool in the hands of a discretionary trader, to the extent that only if you thought it impossible for a discretionary trader to succeed (I do not think that, but I think there are others who do), would you say that Elliott Wave is completely useless. It straddles the line between objective and discretionary, in my opinion. I agree with your point about the use of a specific number of waves to define a finite set of visually-oriented structures. If I am not mistaken, Elliott's rationale was that 3 and 5 represented the minimal number of waves in which both wave types had a Fib number of waves. One of numerous examples of Elliott's heavy reliance on Fib numbers.
I have tested so many different ideas or other's ways of trading through the years and have come to a conclusion that many of different ways to trade will work, so long as you have a trading plan that has great money management rules. So whether it is the planets, Elliott, Gann, Price action, Indicators or even throwing a dart, have well defined entry rules and money management rules and the BIG thing is staying consistent with your rules. Just by reading people's journals, whatever they are worth, hardly anyone ever trades robot like precision, so they lose. I don't have Superstitions, have rules in place to know what to do for any occassion. Markets get too wild, stop day trading and become buyer/seller of options.
Since truth itself is for the most part relative, the judgement of irrational or rational is open to question I think. If a method gives positive expectancy, then maybe you are being irrational by insisting on an explanation that will never exist always in my opinion. Even if it existed, it could disappear quickly as the market changed. A model is only that - a model. Trading earnings do not come from a method or a model as much as from risk management and psychology and consistency. So I think the explanation of "because it works" is perfectly rational in that sense. Instead of searching for rationality, ask if is this an attempt to justify (find mind-based rationale) in a probabilistic real world. And by the way, in my search of methods, it seems to me, many many models actually trade the same thing. Fibs, Gann, and Tridents for example. The more mysterious the explanation, the better it is for some minds searching for certainty where none can be found.
Absolutely agree with Handle. I also switch to options to manage risk in troubled times. The discretionary methods I use have never been published to my knowledge but are obvious when pointed out. A trading plan must contain the essential factors and it will work. The rest is just fluff and superstition on the part of the questioner. There is a favorite story about superstition and pigeons that contains an idea that can answer your thread's title. We are all just pigeons and "they" like to flock us over and over again.
There is definetely a big difference between Elliot wave and astrology. One is observational/pattern recognition science and other is a wudoohodooo. A comparision of elliot wave theory in real life will be a person who avoids taking tollway during rush hour. How does he know by just looking at time in his garage what road to take? SOmeone who doesnt know rush hour will think this guy is a genius. He just looked at clock and said he lets not take highway or avoid the main street and lets take thisor that road. Or another example will be a guy seeing a towtruck, firefighters and cops driving on highway and taking the exit and there by avoiding a traffic jam 3miles ahead. Its basic commonsense and pattern. They see a pattern and try to act on it expecting same thing will happen. That towtruck may or may not be going to accident site, the 5pm rush hour may or may not have traffic. Who knows. Now Astrology wudoo science is like me watching my colleague sneeze just before i open my computer and saying oh god im gonna get all loses (i swear to god i have few colleagues who believe that) or someone seeing a black cat cross the road and saying "hmmm today traffic will be more and i will get stuck"