Philosophy & Methodology

“By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again — and not capriciously, but at regular periods, and each thing in its own period, not another’s, and each obeying its own law … The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint.” — Mark Twain

Cycles indeed rule everything in the universe including man’s affairs. And it is of the greatest importance to recognize that this is also true of the stock market. But it goes beyond just stock movements. The rising of long-term cycles is generally associated with periods of economic prosperity, and their troughs with recessions and even depressions. At the bottoms of cycles, it is not uncommon for the world to experience catastrophic geological disturbances in the form of volcanic eruptions, earthquakes, tsunamis, etc… It is no wonder that Edward R. Dewey, when he published his book “Cycles“, chose “The Mysterious Forces that Trigger Events” as a sub-title.

But cycles can be fickle and their phases do not always replicate themselves exactly or bring about the same circumstances. This is why other analytic methodologies must be employed if one is to arrive at an accurate stock market forecast.

I have found that all theories and methods have their short-comings. The Elliott Wave Theory can be helpful if one uses it for general pattern recognition and does not try to adapt it rigidly to all situations.

The same goes for Delta analysis and others. It is best to use all of them in conjunction with just plain technical analysis. When one applies trend and channel lines properly, it’s amazing how logical the market’s gyrations become.

Oscillators are also very important in my work. I have found that they are the best way to determine the kind of deceleration in a trend which always seems to precede a reversal. The MACD is one of the best invented for this purpose.

As I mentioned in my biography, I make extensive use of the Point & Figure technique. I have come to find it indispensable, and if I had to limit myself to one methodology, this is the one I would choose. It was the tool that old-time traders used before computers arrived on the scene, and it’s easy to see why. Today, sophisticated traders program super computers with algorithms which causes them to make trading decisions faster than a human being could. But you know what? The basis of these programs is probably still good old-fashioned technical analysis.

I want to leave you with a crucial parting thought: treat all expectations about the market very loosely and learn to wait patiently for confirmation of what you expect.

More about my market philosophy is incorporated in Trading/Investing Strategy. Be sure to visit that link.