There are some great posts in this thread from both sides of the argument.
The problem in my opinion with trading patterns in efficient markets is that the minute you trade the pattern (or interact with it), the pattern changes due to participation. If there was a repeating pattern that unfolded over time in a predictable way which you could trade with certainty, then it is game over for an efficient market as all participants that traded that pattern would be wealthy beyond their dreams in short order. So for an efficient market, unpredictability is an essential pre-requisite to at least feed the surviving population.
When you are trading at the right edge, you are guessing how the form will unfold. While in hindsight many forms appear to occur with repetetive frequency, the same could be said about any pattern found in non-predictive data. So what is a form bearing arbitrage versus an illusory form of no value to a trader?
As soon as a trader or more specifically a subset of traders looking for the same pattern interacts with an emerging pattern in this market, the pattern changes form and disappears. This is the challenge of the financial markets which is more like quantum physics whose outcome is dependent on the way you interact with a quantum system than say classical physics where observers experiment with an external system and observe how the outcome rigidly follows the system laws.
In financial markets, the moment you try to take advantage of an emerging pattern it changes form and the more you try to take advantage of it, the more quickly the pattern changes......Taking this one step further, the more that participants in the market try to take advantage of predicting patterns, you actually quickly get no pattern and just all 'noise'(holding no coherent pattern of meaning for a particular class of participant).
An efficient market is one in which arbitrage is distributed efficiently and quickly to its participants and can be treated as the way 'arbitrage' fully dissipates throughout the system. When talking in terms of 'information', an efficient market quickly incorporates information into price. The more market participants that interact with a market, the more efficient it becomes. Of course not all markets are efficient such as quasi markets comprising fewer participants which are established by some predatory players (eg. some brokers) to rig the game in their favour, but for the mature highly liquid markets, efficiency is the nature of the system.
What this means at a deep fundamental level is that by each participant having a particular viewpoint on the value of price, as soon as they interact with the system by placing a trade, that information contained in that viewpoint is passed by the participant into the market and immediately reflected in the price. It may be a bad or good decision by the participant which says nothing about 'efficiency' in terms of price value being attributed to rational decisions....... but there is no disputing that the price on participation fully reflects the information state arising from that decision to trade whether it is the cat that walks across the keyboard triggerring a trade, or an institution unloading risk. The minute you interact with it at a chosen price, the information surrounding that decision is fully reflected in the price itself.
When you attempt to predict or forecast price, you are actually helping markets to become more efficient by incorporating information into that price. For example you hold a view that an upcoming news event will be a bullish announcement relative to what price is doing now and the result of how you interpret your view on price then becomes reflected in price once you take the trade decision. As soon as the information is passed into the market, the info is recorded in the price and the prior form quickly alters. As a result, the prior information held by the participant is no longer valid as it has been fully transferred into the market.
So in a nutshell, a fundamental feature of an efficient market is that it holds very little predictive power as price patterns are just an ephemeral form used at the time of entry or exit. Immediately following an interaction by a participant, a new ephemeral form takes its place holding additional information that provides clues for other participants. The ability for that pattern to extend for a sufficient time in the future in a predictive manner is actually what we are talking about here in our discussion on predictable versus unpedictable outcomes and once a participant has made their decision about entry or exit, that is the only time they interact with the market.
The ongoing nature of form between the original entry and the final exit is up to other participants to create and not one in which you participate so you actually have no control over the outcome and are at the mercy of other participants that interact with it. Your ability to profit from your trade is totally dependent on other later participants having the same but delayed viewpoint as you and the durability of the pattern. That is what I refer to when speaking about the predictability of this market. It is dependent on the way all participants interact with the market that determines whether or not an individual participant profits or not. Given the vast array of participants and their competing objectives, it is impossible to mind read all of them.
So in the absence of being able to mind read, the most objective way to treat this dillema for me is through statistics as it takes an overall measure of the information content contained in the actual system from what has 'actually' happened from a sufficient sample size that is representative of the population of participants who have participated in determining where price currently lies. It does not attempt to take an opinion of prevailing view or motivation resulting from thoughts as opposed to action but (in a gross context) provides a record of the way the system has unfolded through information accumulated by participant interactions. It is trading a tendency supported by statistical evidence from past behaviour as opposed to a pattern or form or subjective repetetive nature. The assumption of course with statistical measures is that the tendency can be extended by extrapolation as a measure of what to most likely expect for the future on the bahaviour of participants. I actually view statistics as an extension of TA as many TA tools are of a statistical nature. What I am not into however is any method of trading that cannot demonstrate validity through the scientific method.
The problem in my opinion with trading patterns in efficient markets is that the minute you trade the pattern (or interact with it), the pattern changes due to participation. If there was a repeating pattern that unfolded over time in a predictable way which you could trade with certainty, then it is game over for an efficient market as all participants that traded that pattern would be wealthy beyond their dreams in short order. So for an efficient market, unpredictability is an essential pre-requisite to at least feed the surviving population.
When you are trading at the right edge, you are guessing how the form will unfold. While in hindsight many forms appear to occur with repetetive frequency, the same could be said about any pattern found in non-predictive data. So what is a form bearing arbitrage versus an illusory form of no value to a trader?
As soon as a trader or more specifically a subset of traders looking for the same pattern interacts with an emerging pattern in this market, the pattern changes form and disappears. This is the challenge of the financial markets which is more like quantum physics whose outcome is dependent on the way you interact with a quantum system than say classical physics where observers experiment with an external system and observe how the outcome rigidly follows the system laws.
In financial markets, the moment you try to take advantage of an emerging pattern it changes form and the more you try to take advantage of it, the more quickly the pattern changes......Taking this one step further, the more that participants in the market try to take advantage of predicting patterns, you actually quickly get no pattern and just all 'noise'(holding no coherent pattern of meaning for a particular class of participant).
An efficient market is one in which arbitrage is distributed efficiently and quickly to its participants and can be treated as the way 'arbitrage' fully dissipates throughout the system. When talking in terms of 'information', an efficient market quickly incorporates information into price. The more market participants that interact with a market, the more efficient it becomes. Of course not all markets are efficient such as quasi markets comprising fewer participants which are established by some predatory players (eg. some brokers) to rig the game in their favour, but for the mature highly liquid markets, efficiency is the nature of the system.
What this means at a deep fundamental level is that by each participant having a particular viewpoint on the value of price, as soon as they interact with the system by placing a trade, that information contained in that viewpoint is passed by the participant into the market and immediately reflected in the price. It may be a bad or good decision by the participant which says nothing about 'efficiency' in terms of price value being attributed to rational decisions....... but there is no disputing that the price on participation fully reflects the information state arising from that decision to trade whether it is the cat that walks across the keyboard triggerring a trade, or an institution unloading risk. The minute you interact with it at a chosen price, the information surrounding that decision is fully reflected in the price itself.
When you attempt to predict or forecast price, you are actually helping markets to become more efficient by incorporating information into that price. For example you hold a view that an upcoming news event will be a bullish announcement relative to what price is doing now and the result of how you interpret your view on price then becomes reflected in price once you take the trade decision. As soon as the information is passed into the market, the info is recorded in the price and the prior form quickly alters. As a result, the prior information held by the participant is no longer valid as it has been fully transferred into the market.
So in a nutshell, a fundamental feature of an efficient market is that it holds very little predictive power as price patterns are just an ephemeral form used at the time of entry or exit. Immediately following an interaction by a participant, a new ephemeral form takes its place holding additional information that provides clues for other participants. The ability for that pattern to extend for a sufficient time in the future in a predictive manner is actually what we are talking about here in our discussion on predictable versus unpedictable outcomes and once a participant has made their decision about entry or exit, that is the only time they interact with the market.
The ongoing nature of form between the original entry and the final exit is up to other participants to create and not one in which you participate so you actually have no control over the outcome and are at the mercy of other participants that interact with it. Your ability to profit from your trade is totally dependent on other later participants having the same but delayed viewpoint as you and the durability of the pattern. That is what I refer to when speaking about the predictability of this market. It is dependent on the way all participants interact with the market that determines whether or not an individual participant profits or not. Given the vast array of participants and their competing objectives, it is impossible to mind read all of them.
So in the absence of being able to mind read, the most objective way to treat this dillema for me is through statistics as it takes an overall measure of the information content contained in the actual system from what has 'actually' happened from a sufficient sample size that is representative of the population of participants who have participated in determining where price currently lies. It does not attempt to take an opinion of prevailing view or motivation resulting from thoughts as opposed to action but (in a gross context) provides a record of the way the system has unfolded through information accumulated by participant interactions. It is trading a tendency supported by statistical evidence from past behaviour as opposed to a pattern or form or subjective repetetive nature. The assumption of course with statistical measures is that the tendency can be extended by extrapolation as a measure of what to most likely expect for the future on the bahaviour of participants. I actually view statistics as an extension of TA as many TA tools are of a statistical nature. What I am not into however is any method of trading that cannot demonstrate validity through the scientific method.