By Hany Saad
The pattern of encounters among ants will depend on how they move around. Ant species differ in characteristic movement patterns; some, such as the red wood ants, tend to walk in relatively straight lines. Other ants, like the Conomyrma insane, move in more convoluted paths. The effects of number of ants, and path shape, interact with each other. When there are few ants, straight paths are better than wiggly ones.
There is wisdom derived from studying ant behavior. While the study is not entirely scientific, to their credit, researchers understand the basic structure of ant colonies. For example, they know through quantifications, observations and experiments which ant species move in straight lines and which move in convoluted paths.
Unfortunately, in the world of markets this precision is impossible. It’s impossible based on TA to predict if a stock will move in a straight line or sideways based on its past path. This basic idea is the reason why TA techniques are not falsifiable.
For example, technical analysts hold that moving averages work best in trending markets while oscillators (RSI, ROE, etc.) work best in consolidating markets. Nowhere in the TA literature does a quantitative description of a trend or a consolidation appear.
In the ants’ world, ants are not born to do certain tasks. An ant’s function changes with the conditions it encounters, including the activity of other ants.
Unlike ants, all technicians I know follow these indicators religiously. They buy when an oscillator reaches some arbitrary number (20 or 30). If the oscillator fails -- well, it wasn’t a consolidating market, and if the moving average fails, it wasn’t trending.
The defect all these tools share is not only are they backward-looking but also non-falsifiable as explained. It’s always the market that failed to trend or consolidate.
The most creative technicians change the periodicity of oscillators or the DMA to some useless Fibonacci number, failing to realize that the defect lies in the structure of the indicator itself. The probability of a retracement or a breakout (conveniently non-defined in quantitative terms) falling exactly at some magic Fibonacci number is extremely high due to chance alone since every other number is a Fibonacci number.
Suggesting that money management will save the day even with a 50/50 system is pseudoscientific and very dangerous. Not only does this show a major misunderstanding of the nature of markets (which is not a zero sum game), but also is an implied assertion that markets do trend (ignoring all academic research disproving trends); so by letting profits run and cutting losses short you can be profitable using such systems. The same reason Richard Dennis went belly up with the turtle system that is (according to one of the turtles) worse than a 50/50 system. The same reason I consider Livermore (more than Ben Graham) the mythical market hero.
I am always reminded of Robert Bacon’s wisdom when I read mumbo jumbo like this. Even if you don’t fall for the switches (between systems), over the long run, on average, like in the races, you have to lose the percentage of the house take. If you don’t have an edge over that percentage, do yourself a favor and buy money market funds.