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    The Trend Hunter
    The Trend Hunter
    The Trend Hunter
    Ebook123 pages59 minutes

    The Trend Hunter

    By Charles K. Langford

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    About this ebook

    Technical Analysis (i. e. the timing in trading) is, as a conclusion of the long experience of the author, the only way to get a positive Alpha in portfolio management. It is not enough: the use of derivatives, not shown here, is also very important. In this book the Author emphasizes the "Langford Protocol" a simple and efficient technical analysis method to capture profits in trading the market, whether is it: stocks, bonds, ETF and futures and whatever is the time framing: overnight or day trading. The method was also published in "Technical Analysis of Stocks and Commodities", the most important magazine for traders.
    LanguageEnglish
    PublisherBookBaby
    Release dateJul 16, 2017
    ISBN9781543907209
    The Trend Hunter

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      Book preview

      The Trend Hunter - Charles K. Langford

      signals

      Introduction

      The single beat of a butterfly’s wing

      The world of the classical geometry, with its squares, rectangles, circles, etc., is foreseeable. If I am asked to draw a square whose side is 9 centimeters, I know that the square has four equal sides and that each must measure 9 centimeters. The result of my drawing is known in advance, because it is based on linear rules and memory, i.e. on the direct cause–effect relation.

      The financial analyst uses this approach in forecasting price trends and he call this method the fundamental analysis. It is a way similar to the traditional geometry: starting from certain facts he predicts the price of stocks and fixed income securities, currencies and physical commodities, according to the direct cause-effect relation.

      But any investor learns by experience (i.e. at his own expenses) that there are no methods truly able to predetermine the behavior of the market prices. To some investors this is like the impossible answer to the demand to describe what will be the form of a cloud in the sky in half an hour from now.

      Despite the popularity of the method, in finance it is quite impossible to make forecasts axed on the linear relationship cause-effect. And this for two principal reasons:

      •The variable factors and their relative importance change continuously. This means that the forecast of the financial analysts may be a true portrait at the time when it is made because it is equivalent to a photograph, the image of a reality at a given time. But later, due to the continuous changes in the determining causes, the photo no more represents the exact reality.

      This dynamism and its consequences can be illustrated by the Snowflake effect of Koch (a Swedish mathematician of the early XX century).¹

      The snowflake of Koch evolves from a simple equilateral triangle, with each side measuring, for example, 9 centimeters. In the center on each side of the initial triangle we trace a new triangle whose side measures a third of the 9 centimeters, i.e. 3 centimeters. The result is the second image, on the top right, which has 12 sides. To the center of each side of the new image we add a new triangle whose sides measure a third of the sides of each of the 12 triangles, i.e. 1 centimeter. The result is the third image, on the left, at the bottom, in which the number of triangles forming the outline has now increased dramatically.

      At the center of each side of this new image we continue to add triangles, whose sides measure one third of a centimeter: we get in this way the fourth image.

      The progression of the number of triangles around this new image continues with the same principles: the resulting configuration will be increasingly different from the initial triangle and will continue to evolve.

      The economic and financial news, dynamic and unpredictable, are like these triangles added to the initial image: the whole contribution modifies more and more the initial portrait.

      There is unfortunately a difference: in the snowflake of Koch each triangle contributes in a foreseeable and symmetrical way to the resulting image. We cannot, obviously, say the same in the field of financial matters, because the economic, political, social facts affecting the initial prevision evolve in an unequal and unexpected manner, creating an abnormal and deformed snowflake, far from the symmetrical one of the Koch’s configurations.

      •The forecast determines the reality. A seismologist expects that most probably there will be an earthquake in a particular region. If the seism really happens, we cannot say that this scientist is the cause. His forecast doesn’t make him responsible for the eventual disaster.

      We arrive at the same conclusion if a meteorologist foresees an increase of ten degrees for tomorrow. If this occurs, nobody says that he is the reason of the warmer temperature.

      On the other hand, if a financial analyst affirms that the price of a stock could increase by 10% in the next three months, its actual price will not remain indifferent: this anticipation will influence immediately the price because the investors are induced to buy the stock: the combined activity of several buyers pushes the price higher. What would be initially a simple forecast of future event can be actualized now or in the next few days, due to the expectation of the price increase. If the price reaches rapidly the target, people sell the stock to pocket the profit and consequently the stock depreciates. The anticipation of the financial analyst has created more turbulence in the price, nullifying or at least weakening and distorting its prevision. Probably the only way for a financial analyst to be right is to make a long term generic forecast of this kind: We foresee that the price of the aluminum will be higher in the next decade or two, given the increase demand of this metal by the growing economies of Asia. This forecast is so generic and useless in the day-to-day activity of the investors that look like what the great economist John Maynard Keynes (1883-1946) said about the forecasting: In the long run we will be all dead.

      Many investors say that the beginning of what could become a trend of price is subject to an ambiguous behavior: the Lorenz’s effect. Mr. Edward M. Lorenz was a meteorologist at the MIT who, in 1972, by describing the difficulty in predicting the weather changes, had given the following example:

      Does the Flap of a Butterfly’s Wings in Brazil set off a Tornado in Texas?

      Obviously the possibility of prediction is impossible. The butterfly effect - thus is called familiarly the Lorenz effect - means that small facts may become big events, absolutely unpredictable.

      Because of these two points, the reliability of any precise forecast made by the economists and the financial analysts on the prices of stocks, indexes, currencies, commodities, etc. are close to the medieval hunters chasing the mythical unicorn in the forests. It is like to play the chess game in the darkness.

      All economic and financial science is based on the principle of the traditional geometry, whose figures are established and known in advance. Actually the geometrical forms connected to the behavior of the prices have rather the profile of irregular, unforeseeable profile, like that of a littoral or a chain of mountains.

      The fundamental analysis applied to the prices reality of the Stock and Commodities Exchanges has its application only in the long term and as a general vision, because what it forecasts is quite obvious.

      But one could as well quote Rabelais, the satirical great writer, who composed the almanac of the people with the forecasts for the following year, the 1533:

      This year the blind men will see very little; the deaf persons will ear quite badly; the dumb men will not speak at all; the rich persons will live a little better than the poor ones and the healthy people better than the sick ones.& The old age will be incurable this year because of the past years.²

      If the fundamental analysis is not reliable in the everyday life of the investors, what they can do? The answer is simple: The investor

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