Technical analysis is filled with concepts – some simple, some esoteric. Every one of these concepts have their own die-hard believers. The results clear in some cases and in some cases are very vague.
There are several esoteric methods, if that is the right word to use. Some of the prominent ones are Elliot Waves, Gann Method and Hurst cycles. There are many many more.
The reason these are esoteric methods is that these are essentially abstract methods with underlying theory which can be very vague for an average person. The underlying themes though might be very relevant the applications of these concepts are fraught with dangers. They are dangerous, not bad or wrong or something similarly mild, because these methods if applied wrong can put us totally in a different trajectory of market movements. If incorrectly applied they can be seriously disastrous to the capital.
Abstraction
First of all, these concepts are not for everybody. Not everybody understands abstraction. If you are an engineer or an accountant type, then this stuff is definitely not for you. The understanding of these concepts requires breaking and modifying space-time-thought continuum (only half joking!) that is not easy!
Although every abstraction too has an underlying of maths in it, including the chaos of markets, it may be inefficient to use these concepts from the word go.
As somebody said, these are the places only the brave and a fool can enter. Very true for these concepts.
Time
The time required to study and understand these concepts are huge. I mean, you may need at least few years to effectively understand the what, the why, and the how of these concepts. Of course, you may use few thumb rules and become masters of the universe but to understand the Why’s you will need years. Even decades.
If the disclaimer is still not clear, let me rephrase – these methods are not for everyone, and if you intend to carry on it would take years to study and apply them – costing time, money and losses, and in the end you may not even ‘get it’ or feel it is worth it.
Temperament
If you do not have the temperament of a philosopher, you may as well forget it. If you cannot meditate on something for weeks and months, hoping some insight would strike you, this is not for you. If you are looking for a quick job-done, this is not for you.
Marginal Utility
Before you actually go out and start your studies and work on thee esoteric concepts, ask yourself – what is it that these concepts can give you which other simpler methods cannot give? Which of the two divisions – the easier one or the esoteric ones, will give you more reward and use in markets? Is it even necessary to study these concepts to trade markets? Do you have the temperament and time to study, apply and implement these methods? And importantly, do you think it is worth it?
If you are looking at the marginal utility of these concepts in short term trading – notice, short term, then you will find the utility next to nothing. These concepts are practically useless - and dangerous. Hence, if you are a short term trader, skip this thing altogether.
If you are a long term trader, there may be something for you here. The simplistic reason being, most of these concepts deal with large business cycles and can give you heads-up years in advance. These concepts can help you understand where in the cycle are we, and also helps you notice the key milestones as it passes by.
To summarize, there is very little utility is short to medium term trading horizon but on a much larger big picture trading these may be a key differentiation.
Margin of error
The unfortunate truth about esoteric concepts is that there are just too many variables to work with. This is especially true, if you dare try using these for short term trading. The amount of variables flying by your window will be a heck a lot more than you want to analyze. The worst part is getting any of these variables wrong can put you in a different point-of-view of the markets, than the reality may be. In short, the margin of error is very less and probability of error is very high.
This is the primary reason people seem to be turned off from these concepts, the application of these never seem to work. Or if it works, works for short instances.
Big picture
As mentioned earlier, these concepts are very good to understand the larger cycles of the society, culture and economy. The very fact that you end up studying lots of history and its impact makes you a better trader.
The big picture is critical if you are a long term investor or a portfolio manager, not necessarily a trading type. Or if you are a manager investing across different geographies. It is very useful for such persons, as these studies gives ready heuristics on how we can understand the underlying society (past, present and current) and scope it offers.
Also, getting a good grasp of big-picture can put you a very strong footing on medium term trades, by helping you understand the underlying themes and psychology of the moves.
Simplicity
Essentially, at the core of these concepts are some very simple but very powerful ideas. The ideas are very simple enough to be explained in a single Para but complicated enough for few books to distill.
If as a seeker if you able to grasp these few guide-posts then you are much better off. The downside however is, people who have cracked some part of the puzzle would hardly share it with you, and the people who share it with you might have dubious credentials in understanding the puzzle.
However, let me reiterate the KEY: the concepts underlying these methods are simple, do not add layers of complications on it and mess it up. More complicated the strategy, more unreliable it will be in actually trading.
Changing
A crucial part of the game here is to know and realize that these are morphing systems. By morphing I mean, these systems change over a period of time – even though they are based on almost unmovable concepts. The reason for such a change is the human behavior of past several decades have changed – not necessarily psychologically but the market system, regulations, opportunities, information feeds etc – these have subtle but definite impact of the manifestation of these ideas.
Hence, if you are studying them, you are studying the growth of moss on a stable rock, the moss’ growth varies as per climate even though the underlying rock / cycle remains constant.
Teaching
The real problem in actually propagating the ideas – in a book, blog or any other medium, is that the preparedness of people is different, and at various levels. To assume, everybody would understand a concept from a particular angle and approach a problem with a particular preceding knowledge, is almost always erroneous. Hence, teaching these concepts successfully is almost impossible. You may learn a few thumb rules of these methods, and start applying them, but to really understand how, why and what makes those wheels turn, you would have to journey yourself. Few good guides along the way are all that you can ask for.
And remember one important thing: There are no accidents.
Better Person
One of the best side effects of learning these systems is that it is guaranteed to make you a better person. If you have been studying and applying these concepts for say, past 10 years, I am pretty sure you are the kind of person I want to know.
It’s the journey, like that of Mr. Frodo that chisels a person’s character over the years.
Keep it Simple
Remember, the stuff has to be simple in order to work - and work effectively. There is no use of a grandiose theory if cannot be applied in all circumstances.
Keep it simple.
Resource: Gann Resources
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