The Finance Book Club

Chapter 8 - A New Manhattan Project
This chapter is strange. It’s not like the others. It’s mainly a rant on the condition of economics as compared to the condition of physics in scientific circles.
The argument is that economics lags behind other sciences, which it probably does. However that’s not of much use to a trader looking for edges, though it is interesting.

It’s also tempting to dismiss much of it as it relies on the questionable testimony of Pia Malaney and Eric Weinstein. Weinstein, might be a crackpot, but it’s hard to say for sure. He certainly acts like one, telling the world he has a theory that will ‘put him ahead of Elon Musk in the visionary hierarchy’ and then NOT sharing his paper on that theory, for the past year or two at least. That’s crackpot behaviour.

At the same time there’s no doubt that he knows a lot about math. His ‘portal’ interviews while somewhat too focused on himself show that he has a deep professorial knowledge about many things, especially math and physics. He’s also presumably smart enough to have Peter Thiel entrust him with his investments. So, tough call.

I’m leaving it in because the sections about CPI are something everyone should know and Schiller didn’t touch on it in his course.

 

1. Pia Malaney
   1. Weinstein’s wife and economist

   
   

2. Eric Weinstein
   1. MIT postdoc researcher with a PhD in math from Harvard

   
   

3. For years Malaney had tried to convince Weinstein that economics was more than mathematically simple ideas
4. Finally she succeeds and now Weinstein is driving for collaboration
5. The index number problem
   1. “The problem concerns how to take complex information about the world, such as information about the cost and quality of various goods, and turn it into a single number that can be used to compare, say, a country’s economic health and status at one time to its economic status at another time.”
   2. Malaney and Weinstein devise a solution based on gauge theory

   
   

6. Gauge theory
   1. “modern gauge theory — the topic on which Weinstein wrote his dissertation — was largely the work of Jim Simons, the mathematical physicist turned hedge fund manager who founded Renaissance Technologies in the 1980s”.
   2. This is a gross exaggeration. It’s largely the work of Yang-Mills. Simons did contribute something to the theory but that too was largely the work of Chern, his partner.

   
   

7. Eric Maskin
   1. Malaney’s advisor thinks the idea is great

   
   

8. Weatherall annoyingly sidetracks with an essay about CPI and the difficulties involved in tracking the value of money with a basket of goods
   1. The Boskin commission is tasked with coming up with better ways to calculate the CPI
   2. Weinstein and Malaney see the commission as their chance to get their theory added to public policy

   
   

9. Hermann Weyl
   1. At ETH Zurich at the same time as Einstein
   2. Matter curves spacetime, causing gravity - in the relativistic perspective
   3. Curvature in the physics sense is defined by “how hard it is to keep an arrow pointing in the same direction as you move it around the surface.”
   4. On a curved surface, different paths can lead to different results (angles) - this is known as path dependence
   5. On a flat surface, no matter what route is taken, the ant faces the same way - "path independent of parallel transport”
   6. The example given for path-dependence is one of those pathetic attempts to take an abstract concept and make it concrete using a physical example even though it makes no sense
      1. “If you go to the store and buy groceries, the amount of milk you have when you get back home is path independent. The amount of milk isn’t going to change if you take a different route home from the store. The amount of gasoline in your tank, however, is path dependent. If you take the direct route home, you will usually have more gasoline left when you arrive than if you had taken the scenic route.” Milk and gasoline. That’s what it’s all about.

      
      

   7. Einstein’s general relativity depends on parallel transport path dependence
      1. But Weyl thought it didn’t go far enough
      2. In Einsteinian GR your directional arrow might not face the same way after moving around a path, but the distance would be the same
      3. Length, too should be path dependent says Weyl
      4. This new theory is called ‘gauge theory’

      
      

   
   

10. Gauge theory
    1. Idea is that there is no universal, once-and-for-all way to “gauge,” or measure, the length of a ruler
    2. Just as the amount of gas left in your tank depends on the path you take to work (direct or scenic route) the length of a ruler needs to be measured in the same location otherwise it’s path-dependent (if you say so)
    3. In Weyl’s theory there is no way to measure the same rulers at different locations, but that’s ok, because a ruler in Copenhagen can be brought together with a ruler on Mars if you can figure how to get them to the same place
    4. This is still not path independent but that’s ok as long as you figure out how the change in length depends on the path you take
    5. Weyl needed a way of ‘connecting’ different points in a formal way
    6. “To determine if two quantities are equal in a physical theory, you need a standard of comparison that accounts for possible path dependence”

    
    

11. Yang and Mills
    1. Weyl’s overall theory was inconsistent with some experimental results and was forgotten
    2. However gauge theory was resurrected in the 1950s
    3. If length is path-dependent are other quantities path dependent?
       1. Yes

       
       

    4. They usher in the ‘gauge revolution’
    5. 1973 - three fundamental forces of particle physics - electromagnetism, weak force, strong force appeared to have been unified into a single gauge-theoretic framework
    6. The ‘best confirmed theory ever discovered in any field’ - the Standard Model of Particle Physics

    
    

12. The academic cattle call
    1. The shitshow that is modern graduate study is explained - students with dissertations that are worth flogging apply to schools who decide if they want to fly them out and get them started on a path to tenured professorship
    2. Pia Malaney was on track for this but

    
    

13. Boskin Commission
    1. Dale Jorgenson an expert on the index problem is unconvinced and ‘throws her out of his office’
    2. The gist of it is that Malaney gets screwed by Jorgenson and the Boskin commission because they have their own reasons to leave the index number as it is. Revealed, annoyingly, later.

    
    

14. Weinstein comes around and sees that math can be used to solve economic problems.
15. Lee Smolin
    1. Concerned that string theory is dominating university resources at the expense of other theories like his quantum gravity theory
    2. Weinstein says the situation is the same but worse in economics
    3. Weinstein and Smolin meet and talk several times
    4. The banking crisis confirms for Weinstein the need to revamp modern economics

    
    

16. Social Security
    1. Aging boomers are putting the system at risk
    2. No politician could risk drawing attention to the problem and suggest reducing benefits

    
    

17. Moynihan and Packwood, senators
    1. Get blamed for the ‘solution’
    2. To come up with $1T without anyone noticing:
       1. Change the value of money
       2. Projections for social security costs are based on expected rate of inflation
       3. Inflation is based on the CPI (consumer price index)
       4. If the inflation rate can be artificially lowered income from the social security tax would rise
       5. Program administration costs would fall
       6. Taxes would be raised and entitlements would fall
       7. Inflation must be reduced by 1.1%

       
       

    
    

18. Robert Gordon
    1. Economist and member of the commission
    2. Jorgenson reported that they were aiming for $1T in social security savings
    3. They needed to come up with an inflation reduction
    4. They broke into teams to work it out
    5. When the results are combined presto - the corrected inflation was 1.1% lower
    6. These findings are criticized ‘from all corners’
    7. The project was ‘rushed and careless’
    8. Now we know why the commission needed Malaney to ‘go away’

    
    

19. The New Manhattan Project
    1. A conference at the Perimeter institute (Lee Smolin's think tank)
    2. The idea is to get a large group of smart people in the room to think about how to fix economics
    3. The conference is a ‘success’ but the chapter ends without telling us how exactly
    4. Smolin says there was too much bullheadedness; no one agreed on what the problems were
    5. There were questions about funding - how would money be doled out to participants (what’s in it for me - the mantra of h. sapiens!)
    6. Smolin shifts his free time from economics to climate science
       1. Economics is ‘intractable’ because the field is not open to new ways of thinking

       
       

    7. Weinstein therefore, is right, economics is ten times worse than physics
       
       Next: The exciting epilogue of this book that is a lot more about physics than about trading, as we have learned to our sorrow!

    
    

I am sure that of the few loyal readers of this thread some of you are eagerly awaiting the end of this academic exercise and here it is at last. To reward you I am including a link to my original notes that includes my footnotes, some of which are hilarious, but possibly only to me.

Epilogue of 'The Physics of Wall St.'

1. Before writing the book Weatherall’s PhD advisor agreed that there is a strong connection between physics and economics but “it’s impossible to do science on Wall Street”
2. Science isn’t a body of knowledge it’s a method of thinking
   1. Since investment banks and the like are secretive, there’s nothing like peer review
   2. So in a way, physics is like science, but economics is like alchemy (but what about all the corporate science that does get done in secret?)
   3. Derman - “Models are at bottom tools for approximate thinking.”

3. Each new innovator attempts to refine the model in a continuous process of improvement
4. If physicists have improved our understanding of finance it’s because they have methodological tools that are useful in studying virtually anything
5. “Far from undermining the usefulness of models in understanding markets, the fact that markets are constantly evolving only makes the iterative process I have emphasized more important. Suppose that Sornette’s model of market crashes is perfect for current markets. Even then, we have to remain ever vigilant. What would happen if investors around the world started using his methods to predict crashes? Would this prevent crashes from occurring? Or would it simply make them bigger, or harder to predict? I don’t think anyone knows the answer to this question, which means that it is just the kind of thing we should be studying.” This reminds me of Sorosian reflexivity. The more we learn, the more we affect the system, which makes what we’ve learned obsolete. This is very foreign to the way we study science where it’s simply assumed, maybe incorrectly, that the laws of nature don’t change.
6. “After years of recession and lackluster growth, it’s time to get creative.” Ok, sure, but you consider the period between 2000-2008 "lacklustre"? In what way?
7. The human behaviour argument against mathematical modelling of markets
   1. Markets are not composed of quarks and pulleys
   2. Physics is fine for billiard balls and and nuclear reactors but it cannot predict ‘the madness of men’
   3. Behavioural Economics
      1. Study of human behaviour isn’t inconsistent with mathematical models to study markets
      2. In fact they are symbiotic

8. Nicholas Nassim Taleb
   1. Black swans show that mathematical modelling is fundamentally unreliable
   2. If Taleb is right we should never trust bridges or dams and take no risks like flying in airplanes
   3. Catastrophic events usually come without warning (Weatherall goes too far - this is true of volcanoes, maybe, but plagues, not at all)

9. Warren Buffett
   1. “Beware of geeks bearing formulas”
   2. Financial innovation makes markets inherently riskier
   3. Financial engineers have come up with more convoluted derivatives
   4. Crashes though, are not new
   5. Guns can be dangerous but can also maintain law and order
   6. Hydrogen bombs though are so dangerous the world would be better off if they didn’t exist (would it?) so maybe derivatives are ‘financial weapons of mass destruction’
   7. Weatherall tries to dodge this one by referencing ‘It’s a Wonderful Life’ (LOL)

10. A long and tiresome explanation of the 2008 financial crisis - skipped. I assume you all lived through it and have your own theories.
    1. Weatherall wants to explain the crisis wasn’t caused by anyone’s financial model but no one is making that argument to my knowledge

11. Jim Simons and Renaissance are proof that someone has figured out how to do science on Wall St.
12. Same with O’Connor.
13. In 2012 “ the world economy still hasn’t recovered from the 2008 crisis. If anything, it seems poised for another collapse.” Well it sure doesn’t look that way from 2021.
14. Ideas will get us through the desperate times
15. “The people charged with running the world’s economies should be as good as Renaissance. In fact, they should be better.” Better at what? I’d settle for ethically better.

My thoughts
Well, this was an interesting history mainly because I like science and I recognize and appreciate some of the anecdotes about familiar characters. If you don't share my interests this was probably an intermission at best. Weatherall should be praised for at least attempting to bring all the then known scientific approaches to finance under one roof. Obviously I think the quality of the examples declines somewhat after Ed Thorp, but that may simply be that I have more familiarity with that material, and maybe Farmer/Packard/Sornette/Malaney/Weinstein are the geniuses they’re made out to be and I just don’t know it.

Can we immediately make use of anything we’ve learned? For the moment, I don’t think so, (although if you weren't paying attention to the Neiderhoffer&Osborne detour, more's the pity for you) but it will undoubtedly be useful at some point in the future to refer to a general approach as matching or being similar to one of the main examples in this book. We will also definitely revisit Kelly’s betting formula.

My notes including footnotes.

Next: Robert Miner's 'High Probability Trading Strategies'. A book that is definitely more about practical matters related to trading. Will it break the pattern of underwhelming specific trading advice books?

Lots to digest in those pages, thankyou. Way too much to comment on, will choose some bits in the fullness of time to perhaps add my own thoughts.

Re Taleb - I think T is misrepresented should those bullet points be correct. That said, most people do - the term Black Swan has a very specific definition. Covid (a plague?) was not a black swan, for example, for the very reason provided.

And just coz its also on this page, yes, a working knowledge or even just an awareness of Kelly can only be a good thing. This would lay to rest any notion that you have aim to be right 100% of the time, something that is sometimes promoted but I zip my lips. {Ralph Vince (the Optimal f bloke) goes into what I consider unnecessary detail refining Kelly for the average punter, but I've sort of forgotten}

I believe you are correct on all counts. Taleb was misrepresented by Weatherall but it's become such a common mistake that the real definition is nearly forgotten.

Ah, optimal f, I'd nearly forgotten about it. Lots of money management topics to munch on coming up, but I don't know if I'll ever get back to optimal f.

Robert Miner's 'High Probability Trading Strategies'.

Foreword

1. Foreword by Carolyn Boroden, the ‘Fibonacci Queen’.
2. She credits her career to Miner’s technical analysis beginning with a presentation he gave on fib retracements applied to the time axis

Preface

1. Promises to teach a complete ‘trade management plan’ from entry to exit
2. Miner has been teaching for 20 years
3. Promises to teach four main factors of TA
4. Promises to teach ‘Dynamic Price and Time Strategies’ to identify probable time and price targets
5. A chapter on real traders showing example trades
6. No video CD with my used Abebooks copy but if this seems promising I will get it and add to the summary

Chapter 1 - High Probability Trade Strategies for any Market and any Time Frame

1. I like the boldness of the implied claim
2. Miner claims the book is unique because it will teach a complete trading plan
3. Dismisses the vague statements in other trading books (good)
4. No such thing as aggressive or conservative traders, only those who follow the plan and those who don’t
5. So far this seems to be rejecting discretionary advice, fine by me.
6. Promises specifics, and how to think about four key factors of momentum, pattern, price and time, how to recognize what is useful and relevant market info and how to execute
7. The CD assumes that the book has been fully read
8. Useful for any active market and any time frame - stocks, ETFs, futures, forex
9. The same ‘market structure’ is made in all these markets, in all time frames (fractal principle of markets)
10. “When a market is set up for change from four different perspectives, the trader has an enormous edge, much more so than if only one or two of the factors are in the same position.”
11. You must have an edge.
12. “The edge you learn in this book is to recognize when a market is in a position to complete a correction or a trend”
13. four market perspectives:
    1. multiple time frame momentum,
    2. simple pattern recognition,
    3. price reversal targets,
    4. and time reversal targets.

14. Vast majority of traders use lagging indicators
    1. Every indicator and oscillator in a charting program is a lagging indicator
    2. Miner’s price and time strategies are leading indicators

15. Miner repeats for what must be the third time what we are going to learn in this book. How about we just learn it instead of hearing what we’re about to learn. It reminds me of the buildup from a sales pitch. More steak, less sizzle, please!
16. Let’s Get Started - subheading right before the chapter ends. Sigh.
    
    Well, apart from the standard razzle-dazzle preface common to many books about trading, where much is promised prior to dinner being served, so far it sounds quite promising. Momentum, specifics, complete systems. Everything but the pattern recognition is hopeful to my ears (eyes?), but hope is a most dangerous emotion and must be tempered with pragmatism.

Chapter 2 - Multiple TF Momentum Strategy

1. MTF momentum strategy is the most powerful filter for any market, any timeframe, for trade direction and execution ‘in over 20 years’. (If you think about it, unless there was something more powerful that he found 21 years ago, this is a meaningless addendum. It’s the most powerful strategy he knows about - that’s fine.)
2. Trading books all tell you to trade with the trend (true)
   1. They don’t tell you how to objectively identify trade direction (true, but you can just eyeball a chart to know that)
   2. They don’t say if the trend is in early or late stages (because that’s the whole enchilada, isn’t it?)
   3. Establishing a trend after the fact is easy (true) but before, hard (true)
   4. Trendlines and moving average crosses are notorious for false trend reversal signals (agreed)
   5. Most methods of identifying a price trend are doomed to fail (agreed)
   6. Indicators derived from price data can only represent what has happened, not what’s going to happen (true)
   7. “Multiple Time Frame Momentum Strategy is not a stand-alone trade system” but useful as part of a trade plan with other strategies from the book
   8. Capital exposure = risk

   
   

3. What is momentum?
   1. Price based indicators show rate of change
   2. “Momentum indicators do not represent price trends. Momentum indicators represent momentum trends” (repeated thrice so you know it’s got to be important!)
   3. Price and momentum don’t always trend together
   4. If a bull trend slows down, a momentum indicator may turn bearish even though the trend is only slowed down and continues long
   5. Miner spends a lot of ink making sure we realize price will not necessarily match our indicator twists and turns. Thanks. We noticed.

   
   

4. MTF momentum strategies (for real this time?)
   1. Miner wrote the W.D. Gann Home Study Trading Course (if you've read Parisboy's musing about Gann disciples this doesn't fill me with confidence, but carry on)
   2. Larger Time Frame Momentum Trend Identifies Trade Direction
      1. Dual Time Frame (DTF) Momentum Rule 1: Only trade in the direction of the larger time frame momentum trend unless the momentum position is overbought or oversold. (ob/os to be defined later)
      2. “smaller time frame momentum reversals are the specific signal that must be made before the trade is even considered”

      
      

   3. Execute the Trade Following Smaller Time Frame Momentum Reversals
      1. Use at least 2 time frames - larger for direction, smaller for ‘trade execution setups’
      2. Only take a trade when two TF of momentum are moving in the same direction
      3. DTF Momentum Rule 2: A trade execution may be made following a smaller time frame momentum reversal in the direction of the larger time frame momentum trend.
      4. Dual Time Frame Momentum setup - when an indicator (rsi, stochastic, macd) reverses momentum into the direction of the higher TF trend
      5. This is required to consider a trade

      
      

   4. All momentum indicators represent the same 'momentum cycles'
      1. “There are only so many ways to crunch the open-high-low-close of price bars”

      
      

   
   

1. Price-momentum divergence systems are useless
2. “I don’t know how many times I’ve read an article in a trading publication about a momentum divergence strategy where, on the same data on the chart the author used to illustrate price-momentum divergence setup and price reversal, there were other identical setups that would have resulted in losses that the author simply ignored!” (true)
3. “The Dual Time Frame Momentum Strategy is to trade in the direction of the higher time frame momentum (daily in this case) and execute following a momentum reversal on the smaller time frame (60-minute in this case).”

1. So, buy the dips is what you’re saying?

1. Bullish reversals are marked and numbered
   1. One issue is that reversal 1 is right at the start of the higher time frame momentum rise; what indicator would tell you to start looking long at this point?
   2. Miner addresses this and says we’re not talking about entry criteria yet- OK, fine.

   
   

2. These minor reversals in the direction of the larger trend is just the condition required to consider a trade
3. Based on the oscillator signals there were 2 clear winners and 2 modest losers (ok, sure)
4. “You can never know in advance if a market is going to begin a trading Range—never.” (agreed)

1. Next we look at the smaller time frame momentum and as Minor points out, entering on the daily (instead of weekly) chart avoids some of the downtrend.
2. Always consider momentum on at least two time frames
3. Reversal signals in OB/OS territory are ignored
4. “If the momentum bullish reversal is in the OB zone, the upside should be very limited and you will want to avoid a long trade.” (often false in practice though; still, the trades you don’t take won’t ruin you)
5. “Only academic authors with questionable trading experience have a trading range strategy, and we’re not going to listen to their nonsense.” (at least we can say of R. Miner, he does not mince words)
6. Miner spends a lot of pages looking at more examples of charts where we are instructed that these are just for consideration, but it’s not clear yet what purpose all this chart-description and examination serves. Is he simply showing that momentum reversal signals often provoke moves in the trend? I’m tempted to say ‘so what’? You could hardly stuff a book full of enough charts to prove that it’s worth trading - better to offer tables of econometric data. So, for now, I’m leaving it out as it’s a repeat of what we’ve already seen with figure 2.7 and 2.9.
7. “If you don’t stick to your trading plan, you are doomed to failure, period. End of story.”
8. “There will always be periods when either the market does not set up for potential trades according to your trading plan or, regardless of your trade plan, the setups will not follow through with successful trades. That is the reality of trading. Believe it and you should be on the road to success.”
9. The Dual Time Frame Momentum Strategy is a completely objective approach to identify trade setups as just one part of a comprehensive trade plan.”
   
   So far so good. We are getting the background material needed to identify setups. Next: what are the best settings to use?

What are the best settings to use?

1. No simple answer
2. Different settings for different markets, and different time frames
3. Settings will change over time
4. The term of the lookback period is the key indicator setting
5. “If an indicator has an OB and OS zone, we want to use it to our advantage and ideally use an indicator lookback period so the indicator reaches the OB or OS zone most of the time before a momentum reversal is made.”
6. The longer your lookback the wider your stop will need to be placed
7. The shorter the lookback period the more false signals you will get (choppiness)
8. There is usually a happy medium
9. My concern is that all of this seems to disregard the point made earlier (bolded) that we can never know the market regime that we’re going to experience in the future, so adjusting settings to match what is happening now is at best, a game of catchup or continual disappointment. It is also fitting settings to the data, rather than letting the data select the setting.
10. Miner shows a chart with a period that is too long, one that is too short and settles for a setting of 13 days for the SPX daily timeframe. The ‘goldilocks chart’?

1. The indicator reaches the OB/OS zones ‘most of the time’
2. Momentum reversals (MRs from now on) are within a couple of bars of price highs/lows
3. No false momentum reversals between OB/OS zones (can we expect to count on that?)
4. “This is how I decide which settings or lookback period to use—it’s very simple: Test a few settings on recent data and see which best meets the criteria for a useful indicator.” (yet earlier he said there was no simple answer)
5. Miner can find the best settings in one minute for any issue
6. Miner addresses my curve-fitting objection!
   1. Are these settings going to continue to be useful in the future?”
   2. The answer to that is “Usually.” (boo)
   3. I can guarantee there will be periods when market volatility and momentum cycles change and the indicator settings you have been using will be much less useful
   4. “That’s the best you can do, and don’t let anyone tell you otherwise.” (Lol, Charles Duell, anyone?)

7. If a market changes trend speed and volatility in the future and the best settings you have found in the past are no longer optimal (how would we define this?) after a few momentum cycles, you may need to shorten or increase the lookback period.

Dual TF Momentum Strategy (DTFMS from now on) Rules

1. Define what is an MR with your indicator
2. If higher TF momentum is bullish
   1. Go long on smaller TF momentum as long as the cross happens below OB zone

3. If higher TF momentum is bearish
   1. Go short on smaller TF momentum as long as the cross happens above OS zone

4. If higher TF momentum is bullish but overbought
   1. No new long position
   2. ‘Possible’ short on a bearish reversal

5. If higher TF momentum is bearish but oversold
   1. No new short position
   2. ‘Possible’ long on a bullish reversal

Seems clear enough?

1. Completely objective
2. No interpretation required
3. Good for any two TF from weekly/daily to 15m/5m

Miner proceeds to show us yet another chart, and yet another table of rules that is IDENTICAL to the previous one for stochastic indicator

1. Once again we are reminded this is just for setups, not for entries
2. The higher time frame identifies trade direction.
3. Lower TF MRs are filters to identify high probability setups

Next: practical pattern recognition for trends and corrections

this is ALL you need to know IMO. markets change, systems crash... but this thing keeps going up.

my dilemma is: should I time entries ?

big players like Buffett love to time entries... but they don't own stocks, they own companies, big difference.... they can fire the CEO, whatever. they don't care about diversification, they don't care about trends... THEY ARE the trend. maybe...MAYBE the best thing to do as small investors is to just buy a diversified index.

beating the market is a waste of time...maybe.

I don't think Berkshire relies very much on timing at all. Either a company is worth buying or it isn't. Buffett will sometimes admit he made a mistake after a decade or so.
I think you are right that this is a luxury of big players, and ordinary mortals need to think about the horizon of their trade. If it won't pay off in a reasonable time you are also paying an opportunity cost.

It depends what you mean by 'beating the market', but since you say 'maybe' you are right either way.

It seems to me that a market that only goes up must be the most inefficient of markets, so beating it is relatively simple (for now). However even Berkshire Hathaway has been unable to beat the US equity indices in recent years, so yes, most people are best off just parking some large percentage of their cash in an index fund and leaving it there until retirement.

For the more adventurous, which I define as people who are either
a) desperate
b) stupid
c) adrenaline junkies
d) big brains with an axe to grind

there are reasons (good and bad) to actively trade, but whether it's better (as in more profitable) to just invest in the market or to actively trade, that is one of my 'open questions' that will likely be difficult to answer. Just for the record I put myself in the a) category as I began trading when I didn't see any more 'realistic' options for me to make money after I left my job in 2015.

If I had known just how unlikely it is to be able to make money trading I would never have started, so that also puts me in the b) category.

However, either by some innate skill or pure luck I have found not just one but several ways to make a (modest, for now) living simply by trading. It is partly about paying attention to what works for other people. This involves being kind and polite to smart people (like LloydOz for example) who often have better ways of doing things, and it requires modesty to admit you are not the smartest person in the world, or even the internet. You will see on ForexFactory this is far removed from the natural instinct which is to lash out at such people as they naturally threaten your ego.

It requires thinking about what must work (and not work) to allow the whole system to function (to exist), and being a little bit creative while NOT overthinking things, which I will be talking about in my journal thread later today.

And it involves a lot of hard work which is one reason I put so much of my time into doing this thread on ForexFactory. Just like Ed Thorp said, information (knowledge) is money. So the more you have, the better, as long as it is unexpected, and novel.

they love to buy at a low price... if price moves against them, they average down... they don't have to time entries yes (I contradicted myself on the same post lol, sorry)...


what I mean is that beating the market is possible but it's a risky game... diversification is the only way to survive in the long term IMO

I should warn you that if you are a fan of Ralph Nelson Elliott and his EWT then you might be 'triggered' by today's chapter and my reactions to it. It is not my intention to see you 'exceeding wroth' and foaming at the mouth in fury at my ignorance of the greatness which is EWT but I personally detest it. I find it nearly impossible to objectively assess any system that uses it. Even when there are serious attempts to 'objectify' EWT, as Miner does, it seems to get complicated and discretionary very fast.

I also want to point out that past books we've read already concluded that such TA methods are spurious. The only reason I'm not dropping this book now is so I can (maybe) show that these methods don’t work (which is nearly impossible as these methods are ‘not even wrong’). I can then put EWT and all pattern-based theories, into the dustbin of Finance Book Club history. I’ll suffer through this for you Robert Miner fans, but know that what follows goes against my current beliefs and I may get increasingly snarky/negative/skeptical/contemptuous, sorry not sorry.

Chapter 3 - practical pattern recognition for trends and corrections

 

1. Elliott Wave
2. Confusing and overcomplicated (not my words)
3. E-wave academics have ruined Elliott Wave says Miner

The overlap guideline

1. “If a market is making a correction, (as opposed to a trend I presume) it should not take out the extreme that began the prior trend, but should eventually continue the trend direction prior to the correction and make a new extreme.”

1. “If a market overlaps a section, ‘more than likely’ (how likely?) it is making a correction.”
2. “An overlap is when a market makes a new low or high, and then trades back into the range of the prior section.”

1. Well this isn’t much like EWT at all, but I am STILL going to call BS on this because nearly every breakout trend does the same thing, as I’m looking forward to proving.
   
   For one thing, if the price doesn’t overlap the prior range at all that’s the very definition of a trend. So what really matters is how MUCH something has to move beyond the past swing to qualify as a trend or how LITTLE something has to overlap the prior range to qualify as a trend. Or how MUCH price has to overlap the range to be considered a correction, or how LITTLE it has to exceed the swing to be considered a range. If I’m not being clear let me know and I’ll try to restate it another way.

Nah, this is venturing into ‘declining pennants’ territory. We need to do some testing.

 

1. “No technical analysis technique, pattern signal, or trade strategy works every time.”
2. Let the ass-covering begin! But obviously, this is true
3. Not every correction will have an overlap of swings before the correction is complete.
4. Not every overlap of swings will be part of a correction.
5. Good to know, but if he doesn’t start talking about quantities soon, either percentages of success, or units of overlap this all becomes meaninglessly subjective.
6. “Most (how many?) corrections do have a swing overlap and most (how many?) overlaps are a part of a correction. Of the two types of failed examples, the most infrequent is an overlap that is not part of a correction.” Maybe in US equities, but not in Forex!

If there’s no overlap here then I’m not sure I understand his definition of ‘overlap’? Do you get it? Please comment if you do.


But these count as overlaps? They don’t even break the swing lows - so why would you even consider this to be a part of the previous downward correction, especially as price has moved up so far with no hesitation since the Aug.16 swing low?

 

1. A correction will have at least three swings - the ABC correction
2. It may have more but we require at least three

But look - price declined after breaking the B swing high and that’s also an overlap - or does it not count because we already found a prior ABC wave? Also why did this correction start at A as the leg A-B is bullish and with the trend?

Next: ABC corrections, give me strength.

ABC (correction) Guidelines
1. The Wave-C should exceed the extreme of Wave-A.
2. If the market trades back into the range of Wave-A, the minimum conditions for a
correction are complete.
3. A trade beyond the Wave-B extreme is a pattern signal that the correction should be
complete.


Notice that an overlap into the range of wave A is unavoidable if price is to exceed the low of point B. Now this is really starting to seem like Elliott Wave, where the place where you start your count makes all the difference in how to interpret the wave. And the next chart raises further objections.


Miner offers that the AB leg of this zigzag is itself composed of an ‘abc’ correction. The question becomes how to distinguish a major from a minor degree wave so that we don’t start our major count in the wrong spot? And then the madness starts.
Complex Corrections

1. Any correction that makes more than three waves or sections
2. Typically have several sections that overlap

Red labels are mine. Notice that the first part of this is a valid ABC correction, and you’d go short after the new low breaks the B swing, but then you’d get stopped out when price makes a new high above the C swing.. Miner addresses this by saying the sections overlapped and made a new low (true) but how many times or by how much do we allow price to move against us before acknowledging the trend isn’t going to resume? This just seems like a loss based on what we’ve learned so far until we move our Elliott count up one wave.


You know what I see in the highlighted box? What price does all the time, and what it was doing to the left of the box -- a bunch of random motion. This could definitely have been part of a trend even though it wasn’t in this case.


Miner believes by showing examples of patterns that didn’t work that it makes him more trustworthy than other TA writers. The jury is definitely still out.

 

1. Overlap is the key to identify a correction (c’mon! Price is always overlapping)

Trends and five-wave patterns

1. Corrections are at least three sections
2. Overlapping a section is the pattern that signals the market is correcting, not trending (but for something so crucial to the whole system it's piss-poorly defined)
3. A correction may make more than 3 sections for a complex correction
4. However once overlapping starts it will most likely resume with the trend (which is just a function of momentum and why a trend is a trend in the first place. If this doesn’t happen it wasn’t a de-facto trend. This is a contrast effect/anchoring bias. Ugh.)
5. Trends usually make five sections and the sections do not overlap (no way - let’s find some examples)

Trend Pattern Guidelines
1. Wave-2 cannot trade beyond the beginning of Wave-1.
2. Wave-3 cannot be the shortest in price of waves 1, 3, and 5.
3. Wave-4 cannot make a daily close into the closing range of Wave-1.
This last rule is a modification of Miner’s. I don’t think it really matters what the original ‘rule’ said.

1. An overlap of the daily closing range of Wave-1 signals the market is probably not making a trend but a correction
2. “Not every trend makes a five-wave pattern that conforms to the trend guidelines. But many trends do” (how many?! I reckon the number can be as big or as small as you want depending on how you define a ‘wave’ which Miner has so far not attempted to do, and it’s getting late for introductions.)
3. “Don’t make wave counting difficult. Think in logical terms” (if I’m thinking logically it would have something to do with putting this book down and walking away)

This is a creative attempt to define a wave but it uses circular reasoning. How can I define a wave 2 using the size of wave 1’s corrections before I know if wave 1 has ended? Wave 1’s extent is defined by the start of wave 2, so it’s in the same set. I need a distance defined by units (probably price units) which when exceeded counts as a correction. Using other parts of the same wave is like trying to measure a ruler with itself. Nonsense.

At this point Miner is reverting back to the hedged language of every TA practitioner. ‘More than likely’, it is a completed correction, etc.

Sure it’s a game of probabilities, but instead of using language to define them, use math.




A while later Miner takes my advice and starts counting corrections in terms of bars elapsed using Gann’s ‘overbalance of time or price’. So here 4 bars of decline are needed to consider a new wave to have started. But wave 3 will have at least one correction steeper than that I’ll wager, and it won’t count as the start of wave four.

1. “Once a trend is complete, the minimum expectation is that a correction greater in time and price should follow than any correction within the trend” (Of course, because by definition if this doesn’t happen the trend isn’t ‘complete’! But it could range sideways for a long while, and do you want to stay in a trade that isn’t going further?)

Fifth Waves are the key

1. Except they really aren’t, as trying to decide which one is the ‘fifth’ is already a huge problem.
2. Miner’s idea is once you’ve confirmed waves 1-4 the end of the trend must be near, but I am obviously unconvinced.
3. Corrections usually have overlapping sections. Trends usually do not.

This looks absolutely typical to me. A great self-own. Recall Miner’s (poor) definition of overlapping: “An overlap is when a market makes a new low or high, and then trades back into the range of the prior section.” So every trend chart he’s shown us has had some overlapping, despite his assertions to the contrary, it’s just a question of extent, which again, hasn’t been measured and formalized.


Miner tries to put it together with the momentum reversals, but this just seems highly subjective and my expectations are at rock bottom.

And as if things aren’t getting vague enough, these factors alone still aren’t enough to identify trade setups. We also need to add ‘price and time position’ which we'll do using Fibonacci.

Found a very interesting article on market timing.. it compares the results of five investing styles:
perfect timing VS invest immediately VS dollar cost averaging VS bad timing VS wait some more (this is me!)

it is called "Does Market Timing Work?"... really recommend reading it.

This one?
https://www.schwab.com/resource-cent...et-timing-work

Chapter 4 - Beyond Fib Retracements

1. Miner begins by deprecating fib retracements (good) but says they can be useful (no)
2. “With three, four, or five retracement levels on a chart, it is imperative that the trader have some method to identify which retracement level is likely to be the support/resistance or trend reversal.” (agreed)
3. This group of strategies is called Dynamic Price Strategy (DPS from now on)

Internal Retracements

1. There are two types of retracements - internal and external
2. Internal retracements (in-ret)
   1. Less than 100%
   2. Used to identify the price target to complete a correction
   3. Ratios are .382, .50, .618 and .786 the last being the square root of .618

3. Miner isn’t going over the history of Fibonacci or ‘sacred geometry’
4. He also isn’t going to explain why price responds to these ‘price and time harmonics’ (because it doesn’t. Further reading https://www.psypost.org/2018/11/people-who-see-patterns-where-none-exist-are-more-receptive-to-pseudo-profound-bullshit-52657)
5. Market trends and corrections are simply the consequence of crowd psychology (no)
6. Almost every corrective high and low is made at or very near one of the four key retracement levels. (I could draw four different evenly spaced levels and achieve the same ‘near’ results.)
7. In order to qualify which internal retracement level is likely to be the price target for a corrective trend reversal we have to make use of ‘alternate price projections’.

Alternate Price Projections

1. APP is the second method for DPS
2. It compares swings that are in the same direction while a retracement compares sections that are in opposite directions
3. The ratios used for alternate price projections for a corrective structure are .618, 1.00, and 1.62
4. The ratios used for a trend structure are .382, .618 and 1.00
5. “If most corrective highs are also made at or very near an internal retracement, a corrective high is likely near the In-Ret that is near an APP. In other words, if an In-Ret and an APP are near each other, they form a relatively narrow-range zone from where a corrective trend reversal is probable. The APP points to which In-Ret is likely to be the corrective high or low in advance.”

If you can’t dazzle them with brilliance ...etc.

There is nothing ‘relatively narrow’ about that zone of probabilities. You might as well say, as long as price doesn’t break the previous swing high (above ‘A’) that it’s worth going short.



“With no APP near the 61.8% retracement, more than likely the 61.8% retracement will not be significant resistance or end the corrective rally. If the JY is making a corrective rally, it is likely to end near either the 50% retracement or the 78.6% retracement and not near the 61.8% retracement.” Well, that really narrows it down. Not!

 

1. often the alternate price projections do not fall near a retracement to create a narrow-range target zone. (how often?)

If you draw enough lines on a screen, eventually the price will ‘interact’ with one of them. It’s that simple. There is nothing here. This is crystals and voodoo. You might as well trade using astrology.

What Miner has never learned or is ignoring is all the degrees of freedom that each new tactic is introducing. The first timeframe momentum reversal, the second timeframe momentum reversal, the five wave pattern, the three wave pattern, the internal retracement, the external retracements (when we get to them), and next chapter we’ll start dealing with cycles. Every complexity that you add to get a price forecast to work this time increases the chance that it will be irrelevant next time.

But the real problem with all of this isn’t that it may or may not work, it’s that we’ve gone from promises of a mechanical, testable, system that could potentially be automated, to a discretionary, subjective system where only the skill of the individual can result in success or failure. How is anyone (like me) supposed to evaluate that?

The techniques and philosophy of this system aren’t even wrong, they simply cannot be proven. So I’m going to bail here. The only thing I’m still curious about is the section on cycles, and maybe seeing what his theories on position size, and exits are all about. If this material ‘resonates’ with you, get the book and let me know how great you’re doing trading it!



Got that? Sheesh.

Miner does offer some good advice at the end of the chapter

1. Your software should be able to do what you need it to do. If it doesn’t make it yourself.
2. Avoid automated price target systems
3. To be successful you have to put in the time to gain the education and experience

Chapter 5 - Beyond Traditional Cycles

1. Cycles are not static but dynamic
2. Average cycle length is fairly useless (I agree but this is surprisingly difficult to prove and for years I thought fixed cycles had some practical value)
3. “Time retracements are made in the same way as price retracements except time units are used instead of price units.”
4. “Most highs and lows are made in proportion to one or more previous sections of the trend or countertrend.”
5. “The ratios for time retracements are .382, .50, .618, 1.00, and 1.618. In most cases, we just use the .382, .618, and 1.00 proportions to help identify time targets for corrections. The ratios are often expressed as percentages, just like with price retracements.”
6. “A correction to a bull or bear trend is usually complete in the 38% to 62% time retracement (TR) zone. With internal price retracements, we look at a specific price for each retracement. With time retracements and corrections, we first look at the relatively broad 38% to 62% TR zone as the high probability target where a three-section correction is usually complete.”

 

1. Miner expects the wave to complete between the .38 and .62 time interval but if it doesn’t that’s because it ‘developed into a complex structure’. So all the bases are covered.

1. Just as there were alternate price projections Miner also makes alternate time projections

All this does is allow you to be more precisely wrong. I could almost consider testing one fib time theory but two? In the immortal words of Sarah Lynn, that’s too much man!

Attached Image

I know have been harsh to poor Mr. Miner, but the remaining non-TA sections of this book seem practically useful so I'm going to forge ahead with his ideas on position-sizing.