Today is Part II of the lengthy but important question I received. As a reminder of what I wrote about yesterday, I have provided the first part of the question I addressed yesterday below.

You have a great honest profile and I enjoy your posts but sometimes I think you have to take a step back and ask if fundamental principles still apply. I think not and I will enjoy your response.  How can “ancient” “Dow Theory” be a good guide when this new global economy presents shifting worldwide centers of real economic improvement that “ripple the pond” constantly, fundamental debt burdens that will NEVER be repaid …

Numbers 4 and 5 below fit into the series of points in the question above. Remember, I chose to address the individual points in the question, rather than specifically tie them to the Dow Theory and its viability in today’s trading world. Dow Theory is helpful to you, or it is not. I take no other position … So, onto the other points, as each is educational unto itself.

  1. algorithm based volatility,

It is true that algorithmic-based software is a contributor to volatility in the markets, and with the increasing use of heuristic software (artificial-intelligence algorithms)  this issue will probably get worse; however, relating back to my physics analogy, all things move toward balance in direct response to natural law, and “natural law” in the markets states that the fundamentals will eventually bring a market into fair valuation. As traders, we will adapt to trading around the artificial volatility (our own software) or we will perish (another natural law in trading).  

  1.  and “mark to model” fantasy accounting?

I agree that “mark to model” accounting is fantasy since it is the pricing of a specific investment position or portfolio based on internal assumptions or financial models – guesswork and assumptions assign value to an asset. I also say, so what else is new? Fantasy accounting has been around forever, and we have somehow managed to survive as traders.

  1. I believe that the future belongs to computer traders with the best software and day traders taking scalps on short term entries based on patterns that are in reality the “shadow” of what the HFT traders are doing. Recent volatility and low volume is a harbinger of things to come for a long time. It’s better to study programming these days than financial statements or charts that only look in the rear view mirror.

I agree we all need the best software to compete, and his point that the technical patterns are but a “shadow of the HFT (high-frequency traders) trading activity is interesting. For purely technical traders, this, as well as the other points he mentions, might be an issue, but, again, the fundamentals, eventually, will bring a market to fair valuation; thus, financial data is, and will remain, the ultimate market fundamental data point. Programming software does not even make the grade. As well, since when is volatility in low-volume trading an anomaly? Volatility in low volume trading is more the norm than not.

  1. The day will come soon when the public will be informed that all their “trading courses” are obsolete.

As to this last point … The day he speaks of is the day we all hang up the spikes. Humans make markets based on our belief that a market will go one way or another, so we buy or sell accordingly. If trading becomes just a matter of turning on the computer and clicking “go,” our human contribution is gone, which means, the game is over.

All in all, the points are thought provoking, and, as traders, we should consider them as “momentum” toward our continuing education.

Trade in the day; invest in your life …

Trader Ed