Sunday, June 12, 2011

Zen and the Art of Trading Stocks

It is hard to use the word Chautauqua in a sentence.  OK, not so hard.  There was a famous book of the mid-1970's titled, Zen and the Art of Motorcycle Maintenance from which I have been inspired to speak to the yin and yang of trading.  The concept is simple, that there are opposing forces always at work in the market.  These opposites only exist in relation to each other and it is their interaction that a greater whole forms and becomes its own dynamic system.

That is why a fellow like Jim Cramer is such an idiot. For an hour a day he does a slight of hand where he paces a pea inside a walnut shell and while distracting you with his clowns hat and a whistle, rearranges the shells and then has you pull out your wallet and pick the shell that houses the pea.  You are betting with the town jester for the right to be the town fool.

In other words, Cramer espouses buy a stock and hope it will go up.  Romantic, but silly.  You may as well hope for world peace, or diamonds on the soles of her shoes.

On the other side is what we espouse at AllanTrends and is best understood within the context of the yin and yang of the marketplace.  It is the recognition of force applied to an object that determines the outcome.  If a greater force pushes, the object goes one way.  If a greater force pulls, the object goes the other way.  Ah, but the wild card here, the key to market success, is to identify the greater force, the one that has the staying power to create a trend.  One solution: look at which way the object is moving, there is the greater force.

After decades of technical trading, from moving average crossovers, to Elliott Waves, to neural nets, to channels to pattern recognition to astronomy to astrology, I was finally ready to see and understand the holy grail of trading. No, it's not a subscription to my AllanTrends.  It is the concept of being one with the market.  This was the essence of my two-second trading system from back in 1998, where I held up a chart to a group of traders at a seminar and asked them, after looking at the chart for only 2 seconds, "Do you wish you already owned this stock?." If the answer is, "Yes," the stock is a Buy, if the answer is, "No," the stock is a Sell, if the answer is, "I need more time," or, "I can't decide," then go on to the next stock.

No one can trade like that, it is too trite, too corny, to simplistic, too much a game, not serious investing, not credible, not Cramer.

As for credibility, it is at once secured by clothing the grail in math:  The AllanTrends Algorithm. An equation when applied to a set of data derived from the immediate past measures the probable direction for the immediate future.  It is an application of rational thought, in lieu of Cramer's bells and whistles, that uncovers, or at least approaches the Zen-like truth of the marketplace, "Being in the moment." My two-second test, reduced to its most basic, rational, objective, self;  The holy grail of trading.

"You look at where you're going and where you are and it never makes sense, but then you look back at where you've been and a pattern seems to emerge. "

— Robert M. Pirsig (Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values)


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