Which Theory of Market Behaviours to believe?

Source: The Universal Principles of Successful Trading - Brent Penfold.


I will briefly summarise it here.

Three Broad Groups:

1. The Predictors

They are:

• astrology
• cycle analysis
• Elliot wave theory
• fractual analysis
• fundamental analysis
• geometry
• W.D. Gann

Practitioners of these schools of analysis believe they can determine where the markets or stocks are heading.

They hold out the appealing notion that you can know the market or stock's future direction and there control your own trading or investing destiny.

They project an appearance of certainty for the future. The predictors present an illusion of knowledge, which in turn presents an illusion of control. These illusions lead to surplus of optimism and confidence and then fall into intellectual trap.

2. The Dreamers

Dreamers are those use indicators, just some examples of indicators and there are too many of them

• ADX
• DMI
• enevelopes
• ratio analysis
• MACD
• moving averages
• ROC
• RSI
• Oscillators

These practitioners are dreamers because most of these indicators are derivatives of the price and contain adjustable parameters. Consequently, they represent second-hand curve-fitted information. Dreamers believe they will make money trading this type of second-hand adjustable data. (Createwealth8888: the key word is adjustable, the promoters of these indicators will always win their case. If you haven't been making money using these indicators, you haven't learn to adjust it correctly. Not a big joke meh?)

3. The Pragmatists

They are those use some of the following:

• breakout analysis
• chart analysis
• DOW theory
• intermarket analysis
• market profile
• pattern analysis
• pivot point analysis
• seasonals
• spread analysis
• statistical analysis
• tape reading
• volume analysis

The pragmatists focus on raw price and raw volume. They have no interests in looking into the future. They prefers not to deal with substitutes such as indicators but focus on the real thing - price.

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Now, I realize I more inclined towards the Pragmatist camp.

Read? Fundamental or Technical Analysis? - Revisit 3

Read? Technical Indicators? - Part 2