By Evan Lazarus
“Many years of my life have been devoted to speculation before it dawned on me that nothing new was happening in the stock market, that price movements were simply being repeated, that while there was variation in different stocks the general price pattern was the same.”
–Jesse L. Livermore “How to Trade in Stocks”
In the last decade or so there has been a giant step forward for those of us that have believed in the value of technical analysis over the years. An article from academia had verified what we traders have believed all along – there are non-random price patterns in stocks and the stock markets. The article was written by the Ph.D.’s from MIT under the guidance of Andrew Lo. It verified that the typical chart patterns such as “head and shoulders” and “pennants” are in fact repetitive and predictive of future price movement. We say, welcome to the club!
At the heart of all technical analysis are two of the greatest scientists/investors who ever walked the earth – Isaac Newton and Leonardo Da Vinci.
From Newton, technical analysis gets the law “for every action there is an equal but opposite reaction.” This is the backbone of the AB=CD parallel movement pattern presented by H.M. Gartley in 1936. Da Vinci’s book on the Fibonacci Summation series presented in his “Codex” notebook illustrates the ever-present nature of these numbers throughout our universe.
Ok, so how does this help us in trading? Even if it does not directly affect your trading at the start. it disproves the notion that the markets are completely and utterly chaotic. If you can find a pattern that repeats and know that it is going to work 2/3 (66%) of the time, then you have powerful information to use because the market is no longer a 50/50 coin toss at that point.
One thing is synonymous in trading, whether you use technical analysis, pattern recognition or any of the plethora of other methods. No one can ever know what the markets are going to do next. No one can ever know how much money is going to be made in the next trade. So the only thing that the trader/investor can control is the amount of risk on the trade. Great traders focus on the amount of money at risk at all times! Winners think, “how much can I lose?” Losers think “how much can I win?” I suppose this is the reason that all the casinos have giant flashing signs showing the jackpots!
