Professional And Amateur

Beginning traders often find a system or technique that seems extremely simple and convenient to follow, one that they think has been overlooked by the professionals. Sometimes they are right, but most often that method doesn't work. Reasons for not using a technique could be the inability to get a good execution, the risk/reward ratio, or the number of consecutive losses that occur. Speculation is a difficult business, not one to be taken casually. As Wyckoff said, "Most men make money in their own business and lose it in some other fellow's."

To compete with a professional speculator, you must be more accurate in anticipating thejiext move or in predicting prices from current news—not the article printed in today's newspaper ("Government Buys Beef for School Lunch Program"), which was discounted weeks ago, and not the one on the wire service ("15% Fewer Soybeans and 10% More Fishmeal"), which went into the market two days ago. You must act on news that has not yet been printed. To anticipate changes, you must draw a single conclusion for the many contingencies possible from fundamental data, or

1. Recognize recurring patterns in price movement and determine the most likely results of such patterns.

2. Determine the trend of the market by isolating the basic direction of prices over a selected time interval.

The bar chart, discussed in Chapter 9 ("Charting"), is the simplest representation of the market. These patterns are the same as those recognized by Livermore on the ticker tape. Because they are interpretive, more precise methods such as point-and-figure charting are also used, which add a level of exactness to charting. Point-and-figure charts are popular because they offer specific trading rules and show formations similar to both bar charting and ticker-tape trading.

Mathematical modeling, using traditional regression or discrete analysis, has become a popular technique for anticipating price direction. Most modeling methods are modifications of developments in econometrics, basic probability, and statistical theory. They are precise because they are based entirely on numerical data.

The proper assessment of the price trend is critical to most commodity trading systems. Countertrend trading is just as dependent on knowing the trend as a trend-following technique. Large sections of this book are devoted to the various ways to isolate the trend, although it would be an injustice to leave the reader with the idea that a price trend is a universally accepted concept. There have been many studies published claiming that trends, with respect to price movement, do not exist. The most authoritative papers on this topic are collected in Cootner, The Random Character of Stock Market Prices (MIT Press); more recent and readable discussions can often be found in The Financial Analysts Journal, an excellent resource.

Personal financial management has gained an enormous number of tools during this period of computerized expansion. The major spreadsheet providers include linear regression and correlation analysis; there is inexpensive software to perform spectral analysis and apply advanced statistical techniques; and development software, such as Trade-Station and MetaStock, have provided trading platforms and greatly reduced the effort needed to program your ideas. The professional maintains the advantage of having all of their time to concentrate on the investment problems; however, the nonprofessional is no longer at a disadvantage because of the tools.

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