Markets Untradable Using Count-Based Strategies

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terminal7
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Markets Untradable Using Count-Based Strategies

Postby terminal7 » 30 May 2007

I realize that most posts in this forum concern software or support issues, but after almost 6 years of studying price behavior and trending I've come to a conclusion that I feel obligated to relate to my fellow traders.

The conclusion is that all markets are untradable using count-based strategies such as EWT - and probably untradable using the more mainstream technical analysis strategies as well. When I say "untradable" I mean 'incapable of being consistently profitable.' Every trader will of course have periods of profitability and loss - my experience has been that 'loss' wins out in the long run. Here's why (at least from the perspective of using a count-based strategy):

Count-based strategies such as EWT are 'resolution dependant'. All of these strategies are based on some sort of counting pattern. With EWT it's all based on the numbers 5 and 3. The pattern in turn is tied to a specific resolution or level of detail (if you show me a 5 point count on your screen I can turn it into a 7 or 13 or 21 point count just by changing the resolution). Any trend can be as complex or simple as you like. It all depends on how close you want to look at it.

Per any given resolution you will find a hodge podge of trends with varying complexity (and that means varying counts). So trends vary their complexity from trend to trend within resolution A and from resolution A to resolution B. The conundrum for the trader and analyst is that there is no way of matching up these patterns with their respective resolution ahead of time. You cannot know that the current trend will appear as pattern X in resolution Y and you therefore will not be able to locate the terminal for that trend.

Let's say that for reasons of simplification you decide to trade a single pattern of 13 counting points. Let's say you're scanning 10 resolutions of AUD/USD looking for your count. Assuming that counting pattern does appear somewhere within your field of vision (at 1 of those 10 resolutions) how will you know where? If you guess, you have a 10% chance of being right. This is why most people using EWT have had only limited success and it is why any counting scheme is doomed to failure.

Complexity moves over resolution and time scale in the market like water flowing over rocks in a stream, and there is no endpoint (the endpoint is relative to resolution). What Elliott saw was just a slice of a certain level of detail. He was wrong to create a market model out of an incomplete picture. It would be like saying that visible light is all there is, that ultraviolet, gamma, and x-ray don't exist.

There is no magic number(s) in the market. At the resolution where a finished trend appears as a line, zooming in will reveal an infinite amount of complexity (assuming no technological limitations). Zooming out will reveal complexity outside of the line, and eventually that line will be assimulated into a higher scale line.

It is therefore the course of wisdom to avoid being taken in by groups like Elliott Wave International, or for that matter anyone claiming runaway success with 'strategy X' or 'market model Y'.

For years I was convinced that the market could be cracked, and by cracked I mean successfully traded. Now I believe the opposite. The fact that counting strategies do not work does not bode well for other types of strategies including technical ones. Even Mandelbrot, who discovered that volatility clusters, could not help us when it came to forecasting any direction for that volatility.

How do I respond when asked 'how then, do some make a living and even get rich doing this?' I point out that the great majority of traders are losing, not making money. I think this fact was born out well by the response to the April 25th post "Anyone making money using MCFX?" Only one person responded in the affirmative out of at least a dozen or so traders in this forum. Success in trading seems to fluctuate just as the market does. Some experience greater highs than others due to fortunate timing or more capital. And even when you look at the famous traders, not all is as it appears. Gann was a fake and Jesse Livermore, though he made a fortune trading, lost his fortune doing the same thing...

I wish that I was simply being overly negative here. I would love to make a living trading. If there's anyone out there who can change my mind, I'm all ears, but it won't be easy.

Thanks for reading my rant.

PS. My thanks to TSS and MCFX for helping me discover the futility and complete my studies. Your Point charts are good and they will be great once you impliment the 168 hour threshold. Still, an untradable market is an impenetrable wall. Please cancel my membership.

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Postby terminal7 » 31 May 2007

The lines below are a snippet from a recent conversation with a friend...
According to my knowledge of way trends resolve in markets no indicator should have any advantage over another. I'm convinced that moving averages won't work. The reason that indicators and MA's break down is that there is nothing that happens in the market that you can pin down, no consistently reoccuring event.

Without a "consistently reoccuring event" there is no reliable way to enter and exit a market. No valid criteria for triggering an entry or exit or re-entry.

The flow between simple and complex is seemless. Today I noticed waves flowing from behind a barge out on the river and I thought to myself, would there be any way to pinpoint where one wave ends and the next one begins? The answer, in my opinion, is NO because the troughs of each wave move just as the peaks do and so the demarcation line between waves is constantly changing. A similar phenomena takes place in the market between resolution levels.

Just some philosophy... But I can't help that think that this conclusion is accurate. It is the culmination of all my study and it well explains why the overwhelming majority of traders fail.

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Postby terminal7 » 01 Jun 2007

Some more snippets from an interesting converstation with a friend...

You mentioned jesse livermore and other sucessful traders I think that when they lost everything it was because of greed and over trading etc, they are deadly combinations.
That may be true. But the point is this: If Mr. Livermore had had a surefire way of determining market direction he would have kept making money. Greed and other emotions would have had little effect if his strategy were reliable and accurate. Whatever he was using wasn't good enough because it produced inconsistent results.

quit worrying about how a wave travels... what caused the wave thats what you want to figure out
It sounds like you're talking about fundamentals there. That's another thing I considered early on but I became convinced (and still am) that price behavior is a natural manifestation of mass psychology and really has little to nothing to do with outside events such as the raising of interest rates. The presence of light could be caused by many things, many types of light sources. But scientist realize that it's important to study how light travels in order to understand better what light is and how it works. Likewise with trends in markets. Any trader that does not understand how trending works cannot claim an understanding of the market. Without that he will always be a potential target for scams and a candidate for disillusionment.

The mkts fluctuate between support and resistence and they are not exact levels
I considered support/resistence trading early in my studies. It's true that the market does sometimes fluctuate within a range. But again, that can never be forecast and the duration of the fluctuation cannot be known ahead of time. Also, there is no telling whether price will react to a certain support/resistence level or ignore it. These "important" levels often have little to no effect. This type of trading therefore cannot be considered reliable.

There is something that is reoccurring, the mechanics of how the the market is bought and sold for a lack of a better way to describe it.
That's pretty vague don't you think? What I meant was that there's nothing that happens at the end of a trend that doesn't also happen anywhere else in the trend. That being the case, there is no pinpointing trend endpoints and it naturally follows that if you can't locate trend endpoints then you cannot locate any other area of a trend such as trend middle or beginning. So these people that say 'just jump in after a trend is already established' are full of baloney because you can never tell whether the current price you're looking at is trend middle, trend end, or trend beginning and hence, the word "established" has no meaning in that sentence.

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Postby terminal7 » 01 Jun 2007

My sincere thanks to those traders who have wished me well, have empathised with my situation, and have tried to resolve my cynasism into positivity. Unfortunately that is probably a Herculean task at this point. I don't mean to rain on anyone's parade by what I've said in this thread. I really wish trading success to all and especially those mentioned above.

Godspeed and good profits to you!

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Postby Guest » 02 Jun 2007

Terminal7, One thing about that jesse livermore story, It stated several times that he done the best in the bucket shops, that was his element, no charts to look at etc , going on price he could pick up buying and selling, no charts to look at there is no way to see any trend short long or any other. Dont think he was to concerned with the trend. Buying and selling is the ONLY thing that makes a market move, nothing else! There is more to consider than just the fundamentals and technicals also. Just about any of your large companys are pretty much global any more, they need currency's from different countries to conduct their business, pay their help etc. They are not waiting for a certain wave count or a moving average to cross another to do their business. They are looking for a price that makes their bottom line look the best it can for that week or that quarter or year working with what is available at the time they need it. There is a lot of players in this game with different agendas. You have importers, exporters option players,central banks, governments, Hedge funds speculators etc , I think all can get my point. If all had the exact same agenda the mkt woudnt move. It has to have a buyer and a seller. When there is more than one of the other thats the way the mkt is going to go. studying the mechanics of how a wave works is not going to tell you anything useful to trading. Starting point is when there is more of one than the other, ending point is when it reverses again, could and does happen over and over everyday. Its not the mechanics of a wave causing it , it is buying and selling, thats it, nothing else. I see you threw light at me now, once again, tell me why I have to know how light travels to use it. I really dont care how it travels, I just know I need it to see at night. To sit and try and figure out how it travels why it works like it does is pointless to me, I use it to do what I have to do after it gets dark. If I were to start making lights then it would be something to look into, until then I will just use it for what I need it for. Terminal7, I have enjoyed talking to you and I wish you the best man, congrats on what you have happening

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Postby Guest » 02 Jun 2007

Terminal7, the congrats was for your wedding,( not your frustration with trading) just thought I would clarify that. Once again wish you the best man.

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Postby terminal7 » 04 Jun 2007

Thanks man, much appreciated. I have to say that you have given me some food for thought. Maybe I should re-approach the market with a less scientific outlook. I'm pretty sure that one could use the old TA concept that 'trends tend to persist' (which is true although itself vague) along with a tight stop loss and probably turn a profit more often than not.

Correct me if I'm wrong but what you're essentially saying is 'let the market come to you'. Trade according to your own financial concerns and things will go well. Hmmm... At first blush that sounds like wishful thinking. It's also about the loosest strategy one could dream of. I don't mean to knock it, I've never tried it, so I can't say it wouldn't work. But I feel that as long as one is willing to keep his stops tight and doesn't mind getting stopped out a dozen times for every 1 or 2 good trades then it probably wouldn't matter what kind of strategy you're using... anything would work.

My Rgds.

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Postby Guest » 04 Jun 2007

Terminal7, No Im not saying let the market come to me. Look at an 288sec chart Friday at the nfp release 8:30 do you see that design. Look at the eurousd,gbpusd and the usdchf , study the rsi from about 8:10 am to 10;30 am, You want to see what constitutes a wave. That was a tidal wave , in your study of waves I know you know what happens to the water during a tidal wave it goes out 1st dont it. Then it comes crashing into shore. Well that design was a tidal wave in the making, since that what has happened, The uschf hasnt stopped dropping, The euro and the gbp hasnt stopped going up. I guess I have already got my 2 good trades in + 1. If I dont take another trade all week I have had a good one already. I would much rather have this " loose strategy" and make something as to one thats so complicated you cant make a dime. You keep bringing up all these studies, waves , light etc, you are studying everything except what moves the market- buying and selling. Yes you are right about moving averages they are useless, they lag too bad and by time you adjust the numbers enough to be useful they look about like the rsi. I have watched the rsi long enough to know when there is a tidal wave in the making or if it is just something that is going to make a smaller wave. Dont really think that would be considered trading according to my financial needs and as an insignificant spec in the currency market my mind set is for sure not sitting here waiting for the market to come to me, its like time, it marches on and waits for no one. Well terminal7 as always have enjoyed talking to you, I will be gone for a while. My daughters last day of school is tomorrow and my" loose trading strategy" has made it possible for me to be able to take my family on a vacation. Both my kids are young yet and it will be be the 1st vacation for my wife and I. The older I get the more I realize how fast time really does go by so going to take some time to smell the flowers as they say. Have a great one

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Postby Guest » 05 Jun 2007

Terminal7, Took two more of my "loose strategy trades" today. Waiting for the departure time of the vacation. a little late getting in them due to last minute preparations but both were very profitable, kids will have some extra money for souvenirs. Up to 5 good trades since Friday morning and still waiting on the dozen small losses. Way beyond your ratio above, a dozen small losses for 2 good trades. all based on what you say never happens.( a consistent reoccurring event) I am truly sorry that for all the intense studying you have done that you did not come up with something that worked for you. I wish you the best of luck in everything Terminal7 and everybody that has been following this little exchange the best of luck to you also. I am off to do something that would not have been possible without trading. Everybody have a great one.

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Postby terminal7 » 05 Jun 2007

I would much rather have this " loose strategy" and make something as to one thats so complicated you cant make a dime...

Well terminal7 as always have enjoyed talking to you, I will be gone for a while. My daughters last day of school is tomorrow and my" loose trading strategy" has made it possible for me to be able to take my family on a vacation.
:D Happy to hear that. I hope you have a wonderful time as a family...

Actually, the counting strategy I used prior to this wasn't overly complex, it just had the serious drawback of not working. :lol:

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Postby terminal7 » 05 Jun 2007

Up to 5 good trades since Friday morning and still waiting on the dozen small losses. Way beyond your ratio above, a dozen small losses for 2 good trades. all based on what you say never happens.( a consistent reoccurring event)
More power to you my friend. I hope your winning streak never dies. I did however look at the RSI examples you mentioned in the pairs and times above and could not make out any patten or shape in the RSI - just a rough line from top to bottom in EUR/USD and GBP/USD and from bottom to top in USD/CHF.

BTW, the only thing that's been scientifically proven to repeat in markets is the fractal shape of a market and that is due to what Mandelbrot calls "memory" or "long-term dependence". It just means that reactionary waves in trends grow progressively larger as the trend matures. In Mandelbrot's words:
...the data overwhelmingly show that the magnitude of price changes depends on those of the past...

The (Mis)Behavior of Markets, 2004, pg. 247
Also, volatility clusters in a way that can be explained by chaos theory - that could probably qualify as a re-accuring event as well...

I have no idea how to explain your success, but if you're going to insist that some single visable shape or design or event (other than those mentioned above) is happening in every trend of the market then you should be prepared to PROVE IT. So far, in my opinion, you haven't done that.

Still, I appreciate your thoughts and I rejoice with you in your success. Have a great vacation and I'll look forward to talking with you when you return.

Rgds

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Postby terminal7 » 06 Jun 2007

Some (more) notes from a conversation with a friend (and Elliott Wave International member)... (his words in bold)

I am... disappointed that you seem to have convinced yourself that money cannot be made from trading, no matter what system is used.
Well, I didn't actually say that profitability was impossible "no matter what system is used". With regard to other non-counting techniques I said the market was "probably untradable". I also said:

The fact that counting strategies do not work does not bode well for other types of strategies including technical ones.

My negativity there is perhaps just do to the fact that I've always viewed counting as having the best chance of any system to be the ultimate system. I still believe that. It's just that my research has shown that counting systems CANNOT WORK. I haven't ruled out other (perhaps technical) systems though I don't have much hope for any indicator or MA based system. If there is a system out there that does work it will definitely not be as accurate as a counting system would be IF counting systems did work.

Actually, counting systems came pretty darn close to working. There is just one bit of required information in such systems that is unfortunately unknowable. That information has to do with RESOLUTION - per any given counting pattern you HAVE TO KNOW ahead of time what resolution to look at...

For instance, if you're trading a 14 point count you have to know that, for this particular trend, your count will appear at a resolution of 20 pips rather than 23 or 25 or 28 or 30 or 18 or 15 or 12, etc... You have to know ahead of time what level of detail to look at to see your count. That's the bottom line, and there is no getting around it...

The fluidity with which trends morph from simple to complex when resolution is changed means that the counting patterns move in succession over the resolution barriers. By the time the trend is finished the patterns become fixed to specific resolutions but until then everything is fluid and changable.

When it comes to picking a counting pattern to trade you can pick anything - pick an even number between 2 and 30 and, generally speaking, I can show you that count in ANY trend in the market. All I have to do is play with resolution. Of course the counts above 14 have the advantage of being more accurate than counts of fewer event points (because they show more detail). I write this paragraph just to show that, except for the accuracy advantage I just mentioned, there is no advantage of one number over the next. There are no magic numbers in the market. I was wrong to take 7 and make it something special (actually 6 if you don't count the terminal point - that's why I referred to "even" numbers above...).

Anyway, in light of all this, I ask you: Why should I continue to have faith in counting? There is no valid reason. And faith, without reason or fact, is blind and useless. I should be willing to follow wherever my research leads instead of doggedly denying the facts. There is no reason to believe in counting anymore, and I would challenge anyone, including (and esp.) EWI, to prove otherwise.

The fact that you, and others, have made money in the long haul means that you're doing something right. It doesn't necessarily mean that you have a winning strategy. It could be possible to make money using EWT if stops are kept tight and a trader is persistent in re-entry of the market. Profitability in this case though should not be attributed to EWT. I suspect that I could throw darts at a board and, if I was persistent and kept tight stops, might be able to turn a profit even from that.

There are 7 patterns between a Path and my Type II Count. If I chose one of those to trade and I brought up 10 charts with 10 staggered resolution settings my probability of success (assuming my pattern appears within my field of view) would be 10%. If I kept tight stops and did a good job of letting my wins play out, I might be able to turn a profit even with that. However, I never wanted to settle for second best and I'm not going to work with a system that's only 10% accurate - even if the possibility of squeezing some profit out of it exists. One's profit in this case would be due more to his stop management than to the system.

I've learned from my experience and therefore don't regret it. But it's time to move on. I'm currently working on a technical strategy that seems to show good promise. It isn't as precise as a count might be but it has the advantage of letting you enter the market at extremely slight RISK! :D It allows for very tight stops...


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